Rates on hold as RBA weighs risks

Interest rates have been kept steady by the Reserve Bank at its October board meeting. Despite a buoyant economy to which the RBA says inflation is the greatest risk, the bank is awaiting the next quarterly inflation figures out later this month for a proper assessment of any need to raise interest rates further.

It will also likely be mindful that the August rate rise is yet to fully impact on the economy and also want to make sure the fallout from the sub-prime mortgage crisis in the US doesn’t hit economic activity.

In any case, the sub-prime fiasco has seen a de facto rate rise for much of the economy already as banks lend more cautiously, credit becomes harder to get and rates rise in response. Home loan borrowers have so far been spared this de facto rate rise in most cases, given the highly competitive nature of the home lending market.

As to the indicators that might tell us where inflation might be heading, the data over the past week does not change the picture much. Consumer confidence and spending are high while the housing market remains flat. Retail trade rose 0.7 per cent in August continuing a solid trend averaging about 0.6 per cent a month this year.

Building approvals fell 1.7 per cent in seasonally adjusted terms in August, seemingly defying predictions that housing construction would pick up in the second half of this year due to low unemployment and high immigration. The overall trend estimate has been modestly on the rise over the past couple of months and the national figure continues to be dragged down by NSW, where housing affordability remains grim.

A 0.9 per cent rise in house approvals was offset by another decline in apartment approvals, this time 3.1 per cent. It’s no wonder rents are soaring in many areas, with apartment investment not yet responding greatly to a shortage of rental stock.