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The industry is bracing itself for a December rate hike as the RBA seeks to control inflation, writes Jessica Darnbrough
INDUSTRY PUNDITS were shocked last month after the Reserve Bank of Australia (RBA) decided to lift the cash rate for the first time in six months.
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The RBA was widely expected to keep rates on hold in November after official figures showed lower than expected inflation in the September quarter. According to Australian Bureau of Statistics (ABS) figures, underlying inflation for the year to September eased to a five-year low of
2.4 per cent, dropping to the bottom half of the RBA's 2 to 3 per cent target band.
But the Bank said in its statement that it expected inflation to rise because of the country's mining boom, which is being driven not just by China and India but also by regional players including South Korea and Japan.
The Bank said Australia's economy is facing a "large expansionary shock" because of the high prices its mineral exports are fetching overseas. Australia's terms of trade are at their highest since the 1950s, increasing the country's wealth.
"Looking ahead, notwithstanding recent good results on inflation, the risk of inflation rising again over the medium term remains," Reserve Bank Governor Glenn Stevens said in the statement.
"The board concluded that the balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent," Mr Stevens said
The Bank also cited strong economic growth and demand for labour in Australia as reasons for the early tightening.
Figures released late October showed unemployment remained low at 5.1 per cent for September.
According to the ABS, employment increased 49,500 to 11,324,900, while full-time employment increased 55,800 to 7,984,500 and part-time employment decreased 6,300 to 3,340,400.
But while labour demand has been strong, building approvals, auction clearance rates and housing finance have all remained relatively flat over the last month, and this trend is expected to continue.
The number of commitments for established housing increased just 1.4 per cent in August.
Meanwhile, the value of investment housing commitments fell by 3.9 per cent in August 2010.
Investment housing was ‘the bright spark' of housing finance earlier this year; this is no longer the case. Indeed, with continued weakness in the housing sector; flat growth in home values over the last month; auction clearance rates consistently below 60 per cent; weak housing finance numbers; and deteriorating building approvals, the increase in official interest rates does not bode well for the housing market.
However, a deteriorating housing market is unlikely to stop the RBA from lifting rates again this month.
In fact, a Christmas rate hike is now looking very likely as the long-term inflation forecast - driven largely by the resources boom - is watched very closely by the RBA Board.
