Soft economic data means RBA will keep rates on hold

Signs that economic growth has been slowed by six consecutive interest rate rises will give the Reserve Bank good reason to keep interest rates on hold when it meets today, economists say.

But while a “hold” decision will be good news for mortgagees and business borrowers, economists are not expecting the pause to last too long, with most tipping a rate rise is likely in August.

After raising rates in March, April and May, the RBA is seen as having some room to sit back and observe how the economy is travelling.

Some clues were provided yesterday, when a small drop in house prices and lending showed that rates are starting to make consumers think twice about their debt levels. In other data released yesterday, exports fell 0.5% during the March quarter and a survey of business indicators produced mixed results, with inventories rebuilding slowly and economists questioning figures showing corporate profits rose 3.9% during the quarter (a statistical change to the survey skewed the results, with Westpac suggesting profits actually fell 2% during the quarter).

Further evidence is expected on Wednesday, when economic growth data for the March quarter is released by the Australian Bureau of Statistics.

CommSec economist Craig James says all signs point to rates remaining on hold today.

“The economy is in good, but not great shape, suggesting that now is an appropriate time for the Reserve Bank to move to the interest rate sidelines. While it is encouraging that both sales and profits grew in the first three months of the year, the improvement is far from uniform across industry sectors.”

“A renewed fall in business lending is also a worrying sign. Whether companies are reluctant to borrow or banks are being cautious about lending, the bottom line is that outstanding business loans are continuing to fall.”

Like a number of economists, James says the RBA must give consumers time to react to rising rates. Most economists are tipping rates will remain on hold until August, so the RBA can see the latest inflation data for the June quarter, which will be released in late July.

However, the release of the Westpac-Securities TD inflation gauge yesterday shows inflation remains a problem, with the gauge suggesting inflation is running at 3.5%.

That will make the RBA very nervous and is likely to lead to more rate rises in late 2010.

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