THE BIG PICTURE: Five reasons the RBA won’t raise rates

The Reserve Bank Board meets again on Tuesday to decide interest rate settings. But this month – as was the case last month – there is no contention: there is no need for a change in rate settings in either direction.

First, the floods that occurred in Queensland and other states, as well as Cyclone Yasi, are still causing variable business conditions across the country. Some businesses are still not fully back up and running, while others are starting to benefit from the repair/refurbish/rebuild work.

Second, is consumer conservatism. Consumers are still not spending like they used to, causing inventories to accumulate and thus translating into on-going discounting. The RBA Board members get sent their papers for Tuesday’s meeting on Friday, so it is unclear how much of Thursday’s and Friday’s data finds its way into the packs. Board members will also need to take into consideration next week’s results for the inflation gauge. Importantly the core measure of prices in the inflation gauge has barely moved over the past seven months.

Third, the housing market has clearly flattened. One large builder has told us that he has cut staff from 300 to 220 and will soon shift to a nine-day fortnight. Home prices are also falling in many parts of the country. Simply, demand and supply are better balanced, making builders and vendors nervous, but providing opportunities for cashed up buyers.

Fourth, consumers and businesses are still more inclined to put money in the bank rather than borrow. Credit demand remains soft with business lending still falling in annual terms and personal credit growing at a slower pace than the rate of inflation. Housing credit may be holding up, but it is also poised to slow in line with new housing loan demand.

Fifth, there is the mixed state of the global economy. The US economy continues to improve and Asian economies are solid. China is also in strong shape, but it is battling to keep inflation under control. Europe is multi-speed though and then there is the instability in North Africa and the Middle East that is affecting activity in the region and confidence in other parts of the globe. While activity in Japan will pick up later in the year, the economy will be soft for the next few months.

Overall it is clear that the safest place for the Reserve Bank is on the monetary policy sidelines. The next move in interest rates is still more likely to be up, not down, but given all the shocks that have occurred in 2011 so far, it would be a brave person to state these views with 100% confidence.

The week ahead

The start of the month is usually a busy time for economic data and events and April is no different. More than half a dozen key economic indicators will be released over the coming week with a decision on interest rate settings thrown in for good measure. In contrast there are only a spattering of economic indicators to be released in the US.

On Monday the monthly inflation gauge is released together with readings on job advertisements. For seven straight months the core measure of the TD Securities inflation gauge has barely moved, either flat or up 0.1% in monthly readings over the period. Another month of negligible growth would guarantee that the Reserve Bank Board leaves rate settings alone when it meets on Tuesday. The three-month annualised rate of core inflation stands at just 0.3%.

The Advantage job ads index rose by 6.1% in February and the ANZ series was up by 1.2%. Job ads lead employment growth by five to six months, so the job market should remain healthy, perhaps translating into stronger consumer spending.

As well as a Reserve Bank Board meeting there are a couple of economic indicators to watch. Trade data for February is released together with the Overseas Arrivals and Departures information. The latter includes statistics on tourist arrivals and departures as well as migration flows. It may be too early to see the impact of the floods and cyclone on tourist arrivals. But migration should be in focus – politicians have to work out that our economy needs more skilled labour. A trade surplus of $1.2 billion is expected for February.

The initial soundings from the Bankers Association suggest that demand for new home loans slumped in February, possibly as much as 7%. Now clearly the impact of the floods and cyclone on the Queensland market should be carefully dissected. But if the weakness is more uniform across the country then the Reserve Bank will start worrying about a loss of economic momentum.

The most interesting economic data in the coming week will be Thursday’s jobs data. Employment has gone backwards over the past two months with the number of jobs down by 10,100 in February after lifting by 7,700 in March. Clearly there is a “Queensland effect” with jobs down in that state by over 20,000 in February, but four other states and territories also lost positions. Unemployment remains low at 5%. We tip job growth to rebound by 25,000 in March with the jobless rate largely unchanged, perhaps a tad lower.

In the US, the economic indicators are few and far between in the coming week. The ISM services gauge is released on Tuesday with weekly jobless claims (new claims for unemployment insurance) to be issued on Thursday together with consumer credit data, while figures on wholesale sales and inventories are issued on Friday.

The other indicators – consumer credit and wholesale inventories – are largely of secondary importance for investors, but they deserve more attention. Consumer credit has risen for four months after 20 months of declines, so the lift in lending is clearly positive for consumer-focused businesses. And wholesale inventories are also rising, for the simple fact that they have to because sales are strong. In fact, the 3.4% lift in February sales was the biggest in 24 years. The stock to sales ratio is at record lows.

Sharemarket

There have been mixed performances on world sharemarkets since the start of the year. So far 33 of the 72 bourses tracked are higher now in local currency terms while the remainder have fallen. The country with the strongest sharemarket is Russia (up 14.2%) followed by Romania (up 13.8%) and Ukraine (up 12.4%). Also notable at the top of the leader-board is Greece, up 14.8%, and clawing back some of the 35.2% decline in 2010. At the other end of the leader-board the Egyptian sharemarket is down 20.3% with the Tunisian bourse down 13.2%.

The Australian sharemarket is close to the middle of the leader-board, largely unchanged over 2011, putting it in 34th spot. Still, after being broadly unchanged in 2010 as well, that means the sharemarket is still little different from where it closed at the end of 2009.

Interest rates, currencies & commodities

The Australian dollar ended 2010 around US101.60c and it looks like ending the first quarter around US103c. That modest appreciation of 1.2% ranks the Aussie dollar at 38th in our table of 120 currencies across the globe. So far in 2011, 59 currencies have strengthened against the US dollar, 28 currencies have been largely stable and 33 currencies have weakened.

The strongest currency in the world so far this year has been the Paraguayan guarani (up 10.2%) followed by the Hungarian forint (up 9.7%) and Romanian lei (up 9.5%). Interestingly, eastern European and western European currencies dominate the top end of the leader-board. The Euro is 9th strongest against the greenback with a gain of almost 6% with the UK pound up 3.7%. At the other end of the leader-board is the Vietnamese dong (down 7.3%) followed by the South African rand (down 4.2%) and Kenyan schilling (down 3.8%).

Craig James is chief economist at CommSec.