Builders and retailers slam rates hold decision as RBA awaits first-quarter inflation data

Economists remain confident that the Reserve Bank will cut interest rates next month (May 1) after leaving the cash rate unchanged at 4.25% yesterday as expected.

While all 24 economists polled by Bloomberg ahead of the announcement correctly called the April hold decision, it was slammed by industry bodies representing struggling sectors of the economy.

The Housing Industry Association (HIA) has called the decision “the wrong call,” pointing out that there is “very little driving the economy” outside of the mining sector, while the Master Builders Association (MBA) says it was “disappointed rates were not cut given the current poor conditions in the building industry”.

Most upset was the Australian Retailers Association (ARA), which says retailers had been king hit by the decision, coming just a few hours after ABS figures showed that retailing recorded virtually no growth over February and in fact went backwards in non-mining states.

“As retailers attempt to innovate and adapt to a changing retail environment, compete effectively and maintain hours and employment levels, the RBA has dealt the sector a king hit and shown little regard for working Australians or small businesses as they struggle to take home a living,” says ARA executive director Russell Zimmerman.

While economists were more measured in their responses, the underlying tone of their reaction suggested the RBA could have moved earlier and cut rates yesterday.

Former Gillard government economic adviser Stephen Koukoulas analysed the RBA statement by Glenn Stevens accompanying the decision and says it containsmore weak news than strong news.

Koukoulas says it is “anyone’s guess” why the RBA had not cut rates.

CommSec chief economists Craig James says the case for a rate cut is “certainly compelling – especially given the sluggishness in retail activity, higher Aussie dollar, and slump in home construction”.

“In addition the monthly inflation data has consistently confirmed that inflation is subdued. But in the end, the Reserve Bank decided to keep its powder dry,” he says.

Economists appear to be in agreement that the March quarter inflation data to be released on April 24 will be the key number guiding the RBA’s next move.

Craig James calls the inflation number “the deciding factor”.

“The key phrase of the statement was: ‘The board's view was also that, were demand conditions to weaken materially, the inflation outlook would provide scope for easier monetary policy’.”

“In fact if the inflation data released on April 24 comes in at or below 0.7% for the March quarter, it should provide the Reserve Bank with additional degree of comfort and allow policy makers to cut interest rates by 25 basis points in May,” James says. 

Commonwealth Bank chief economist Michael Blythe calls yesterday’s decision a “prelude to a rate cut”, acknowledging that expectations of a rate cut had risen prior to the meeting.

“Speculation built over the past week that the RBA might deliver a rate cut at today’s meeting,” he says.

Blythe says there was a “broad hint that a rate cut will be on the table for discussion in May”.

“The pace of activity is a little weaker than expected but due diligence requires waiting for the first quarter CPI [due April 24] before considering a further step to ease monetary policy”.

“We are happy to hold with our May rate cut call as a result,” he says.

Aside from the inflation figure on April 24, the RBA will also have the benefit of other useful data at its disposable.

Housing Finance figures for February are out on April 11 and will show if mortgage demand has picked after the traditionally quiet January period.

On April 18 building activity figures December will be released for the December quarter and will show if the downturn in the September quarter for both residential and non-residential construction was sustained in the final three months of 2011.

The March quarter capital city house price index data will be released May 1, just a few hours before the May board meeting, giving the RBA a clearer sense of just how soft the housing market is and offer clues as to its future direction.