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The Reserve Bank could be forced to keep rates on hold until at least August as the Australian economy comes to terms with the disaster in Japan
INTEREST RATES in Australia are currently caught between strength in commodity prices and consumer caution.
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While Australia’s mining boom continues to go from strength to strength, it seems consumers are still wary of spending any money or entering the property market.
House prices and building approvals fell in January, according to figures from the Australian Bureau of Statistics.
The number of loans granted to build or buy houses and apartments slumped for the first time in seven months, falling 4.5 per cent from December.
But ANZ economist David Cannington said the drop in demand could be largely attributed to the spate of natural disasters earlier this year.
Demand for loans in Queensland plunged 16 per cent as the state’s devastating floods and cyclone Yasi took their toll.
But while the floods have had a significant impact on home buyer demand, the inflationary boost from the floods was less than expected.
The TD Securities inflation gauge rose just 0.2 per cent in February, leaving plenty of scope for the Reserve Bank (RBA) to keep interest rates on hold – which is precisely what occurred following the Board’s March meeting.
While the RBA retains a tightening bias, it currently sees no urgency to act on it, especially as the problems in Japan will no doubt filter through to the Australian economy.
“The Japanese crisis will have a slight dampening impact on the Australian economy in the short term via reduced demand for raw materials,” AMP’s chief economist Shane Oliver says.
“However, it’s worth noting that since 1993 Japan has had five recessions and Australia has had none. And once rebuilding commences it will result in increased demand for raw materials. A rethink about nuclear energy will likely also result in increased demand for Australian gas and coal.”
So while Mr Oliver says the uncertainty generated by the Japanese situation may well push the next rate hike out to July or August, he does not subscribe to market expectations for a rate cut on the back of the Japan crisis.
“While the Australian dollar is potentially vulnerable to further weakness on the back of the disaster in Japan, over the longer term I expect the dollar to remain strong as Australian interest rates remain relatively high and as commodity prices remain high.”
