Business data suggests rates on hold

The interest rate hikes over the last 12 months are starting to bite with new data from the Australian Bureau of Statistics showing that business investment has fallen dramatically.

Private new capital expenditure on buildings and equipment fell 2.5 per cent to $20.56 billion in the first quarter of this year as firms reined in spending and cutback on expansion plans. The results were well below market expectations of 3 per cent and suggest that the economy is slowing faster than originally forecast. The data indicates that businesses have really begun to felt the squeeze of higher borrowing costs, a spike in the oil price and the flow-on effects from the global credit crunch.

As business investment is a key driver in the Australian economy, these figures certainly reduce the risk that the Reserve Bank will be acting on rates when it meets next week. RBA Governor Glenn Stevens would be very nervous about pushing the button on another rate rise too quickly as there are some serious risks associated with too much monetary policy intervention.

While the contraction in spending over the quarter suggests that the RBA’s inflation targeting policy may be working, the pipeline for new investment is predicted to remain strong. During 2008-09, firms expect to spend 25 per cent more on investment despite higher interest rates and rising production costs.

Capital intensive mining firms are the most bullish with their investment plans as they try to keep up with China’s appetite for resources. This means that the RBA will remain on alert for the remainder of 2008. Pundits are predicting a rate rise in August and November, but a clearer picture of where the economy is heading should emerge next week with the release of national account figures for the March quarter.

Infochoice.com.au