Australia | Dec 04 2006
By Chris Shaw
Did the Reserve Bank of Australia (RBA) go too far with its latest rate hike? A number of economist are asking the question following the latest economic data, which according to the Commonwealth Bank shows an economy struggling to find momentum.
The data showed building approvals fell 7.4% in October and job ads falling 3.8% in November, while there was a 0.2% increase in underlying inflation. In the bank’s view the RBA may have indeed tightened the screws too far, as the weaker figures are too early to reflect the latest hike in November and may not fully reflect the August increase in rates.
Business spending, which has been strong, is showing signs of turning down, while the slide in building approvals has the bank suggesting any pick up in the housing sector is now at least a couple of quarters away.
It is a view shared by Westpac Bank, though it suggests the figures exaggerate to some extent the effect higher interest rates are having on the sector as while the downturn is likely to continue, it will be from a higher base than originally expected. Additionally, the bank notes the data in recent months have been extremely volatile, so the figures may not be providing such a good indicator currently.
There seems little doubt the economy is slowing though, ANZ Bank suggesting this week’s growth figures are likely to show GDP for the September quarter growing by 0.3% and for the year by 1.8%, while in the bank’s view there is some evidence the growth in the mining sector has peaked.
It points to non-farm inventories as a major contributor, estimating from the latest figures they will cut about 0.4% from the growth outcome. The bank suggests there is some chance growth in the current quarter will be flat or even down, which again supports the view the RBA may have tightened the economy too much in its attempt to defeat inflation.
Commonwealth Bank is a little more optimistic at 0.5% growth for the September quarter, which equates to 2.1% for the year. Regardless of who is closer to the mark, the growth figures in coming months are likely to be somewhat weaker than the RBA may have expected, which is likely to lead to speculation rates in 2007 could actually be in line to move lower rather than higher.