Tuesday, 28 February 2012

Soft Data Keeps The Door Open for Interest Rate Cuts


A slurry of top tier data today paint a picture of weak credit, weak housing and still soggy retail sales.  These trends have been evident for a while and are probably not a massive shock to the RBA, although they leave the possibility of an interest rate cut alive.

Each of today’s indicators is important in their own right: the fact that all of them are erring on the side of weakness makes the situation problematic. 

Just to reiterate:  Housing credit growth rose 5.3% in the year to January – the weakest growth in this indicator in almost 35 years.  Personal credit fell 1.4% in the year to January and has fallen in 8 out of the last 10 months.  Business credit fell in January but is 1.2% higher over the year. 

Retail sales, which make up around one-fifth of GDP, rose 0.3% in January, but this follows monthly changes of a 0.1% fall in December, no change in November and a rise of 0.1% in October.  In the last four months, retail sales have been very soft with next to zero growth.

On credit and retail sales, it looks like the consumer funk of the last couple of years continued into 2012, notwithstanding the 50 basis points of interest rate cuts in the latter months of 2011.

There was also a 7.3% fall in new homes sales in January, confirming just how sluggish the interest rate sensitive housing sector is.  

In other news, construction work done also fell a hefty 4.6% in real terms in the December quarter, but it must be noted this followed a sharp rise in the previous quarter.

The case for easier monetary policy remains strong, although the RBA still has a bee in its bonnet about the mining boom, a tight labour market and improving global economic and market conditions. 

A rate cut could be delivered at any meeting – a cut in February would not have been out of place given the run of recent data and the now bubble-ish Australian dollar.  Whether the RBA cuts in March is not at all clear.  There is no doubt it could (should) cut interest rate without fuelling a lift in inflation.  This judgment is shared by many Board members, but whether the news between the February RBA Board meeting and now is sufficiently soft for that judgment to spread to the doubting Thomas' on the Board will be revealed on 6 March.

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