Reserve Bank to hold rates steady

Economic news this week seems to suggest the government’s stimulus measures are starting to have some effect. According to one leading industry construction group, the rate of decline in the Australian construction industry is slowing down. Its research suggests that levels of activity in the sector have improved by 10.4 points to 46.9 points over the course of May, just three points shy of the 50 point level that separates the industry’s expansion from contraction.

The fall in job advertisements appears to have stabilised as well, despite economists’ predictions that unemployment is set to reach 9 per cent. Statistics from one Australian bank show the total number of jobs advertised in major newspapers and on the internet fell by 0.2 per cent in May, taking the annual reduction in advertisements to 49.1 per cent.

These figures give rise to some cautious optimism, a conclusion clearly drawn by increasing numbers of Australians. This is evident from the results of a few recent surveys that analyse business and consumer confidence in the Australian market.

In another bank survey out this week, business confidence in May increased by 12 points to -2. While pessimists continue to outnumber optimists, this is the highest level of confidence recorded in the market since February 2008. The bank found the improvement in outlook was spread broadly across the economy, but it was particularly noticeable in domestically-driven sectors such as construction, manufacturing and wholesale. These sectors are set to benefit from the federal government’s proposed $22 billion investment in infrastructure which was announced in the May budget.

Meanwhile, a consumer sentiment survey also released this week, reported a 12.7 per cent improvement in June from 88.8 in May to 100.1 in June, the largest increase in the index in 22 years. Economists are suggesting that the release of the March quarter national accounts figures last week have provided a major boost in confidence, as these figures registered a small but positive growth rate for the Australian economy, a sign that Australia has so far managed to avoid a recession.

While these figures are comforting, it means the RBA will have to keep a close watch on inflation. According to one bank’s survey of consumer inflationary expectations, inflationary expectations rose to 2.8 per cent in June, up from 2.3 per cent in May. This increase was predominantly due to the larger than expected jump in March quarter GDP and the recent increase in petrol prices.

For the time being, these tentative signs of economic recovery mean the Reserve Bank is likely to hold rates steady at 3 per cent. This is assuming that inflation remains in the band between 2 to 3 per cent. This is partly to allow the market to absorb the impact of rate cuts implemented so far, and partly to avoid sending the economy into an inflationary spiral.

Infochoice.com.au