Wednesday, June 02, 2010

Could the Reserve Bank have gone too far?

New signs have emerged of a slump in home building and consumer spending as the Reserve Bank has signaled that interest rates will stay on hold for some months to come.

In a statement released after the board voted to keep rates steady for only second time in nine months Bank Governor Glenn Stevens said he viewed "this setting of monetary policy as appropriate for the near term".

Treasurer Wayne Swan declared the statement "welcome relief to the families and businesses who are of course doing it tough."

ANZ economist Katie Dean said it meant the Bank would be "in no rush to move any time soon".

"Indeed it may well stay on the sidelines for an extended period," she added. "The risks from both the European debt crisis and attempts to slow an overheating Chinese economy will not be resolved quickly."

The decision coincided with Australian news of the biggest drop in house building approvals since the introduction of the GST...

In Victoria private house building approvals collapsed 24 per cent in April, falling from 3330 to 2540 - the first time fewer than 3000 approvals have been granted since mid-2009.

"Two things are at work. The government has withdrawn its First Home Buyers Boost and the Reserve Bank has been tightening rates in order to slow the economy. This is the first time it has hit building," said TD Securities economist Roland Randall.

"Property is the most leveraged direct investment held by households and therefore most sensitive to a rise in rates, particularly because Australian mortgages are almost entirely subject to floating rates."

The Victorian collapse was centred around Melbourne where house building approvals slipped a seasonally-adjusted 30 per cent. In regional Victoria they fell 5 per cent. Nationwide, approvals fell 15 per cent with Victoria accounting for half of the decline.

"Now we know why the Reserve Bank feels it can slow things down on the rate hike front," said IPAC Securities economist Adam Carr. "Lending has dropped off a cliff and there are market fears about Europe and China. You can add to that building approvals. The real surprise is that housing approvals that fell rather than apartment approvals."

Retail spending figures also released as the Bank board met show no spending growth since January. Seasonally-adjusted spending at clothing and department stores actually fell between January and April. Over the year to April clothing sales fell 8 per cent.

"It is clear the cumulative rate hikes have taken their toll and discretionary spending is being wound back," said CommSec economist Savanth Sebastian.

The statement issued after the Reserve Bank board meeting was unusually short and included no discussion of consumer spending or the housing market.

Instead the Governor spoke of concern about the creditworthiness of several European countries and falling international share prices.

While he still expected global growth to be above trend, conditions would need to remain "under review". In Australia high export prices would add to incomes while the wind down of stimulus programs would hold them back.

With interest rates charged to borrowers back to around their average of the past decade there was no need to change for the near term.

Financial markets last night put an 85 per cent probability on rates remaining on hold next month with a 15 per cent probability of rates being cut.

Published in today's SMH and Age 

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