Interest rates remain on hold

Business borrowers and mortgage holders have been spared an interest rate rise, with the Reserve Bank deciding to keep the cash rate at 4.75%.

The decision did not come as a surprise to economists, who now expect rates to remain on hold until the second half of the year, when a rise in construction and retail is forecast.

RBA governor Glenn Stevens said in a statement that inflation is consistent with the medium-term objective of monetary policy.

“These moderate outcomes are being assisted by the high level of the exchange rate, the earlier decline in wages growth and strong competition in some key markets, which have worked to offset large rises in utilities prices,” Stevens said.

Stevens said any impact on food prices from the floods should be temporary, and the bank is not considering it in its evaluation of underlying inflation.

“Production losses due to weather are temporarily raising prices for some agricultural produce, but these should fall back later in the year,” he said.

“Overall, looking through these temporary effects, the bank expects that inflation over the year ahead will continue to be consistent with the 2% to 3% target.”

CommSec economist Craig James says if underlying inflationary pressure remains contained, the RBA can “stay on the sidelines” well into 2011.

The last interest rate rise was a 0.25% increase on Melbourne Cup day in November, with the major lenders increasing their variable home loan rates by far more than the official rise.

Meanwhile, the Australian Bureau of Statistics reveals business inventories rose 0.7% in the December quarter after falling 0.9% in the September quarter.

The 0.7% figure exceeds economists’ expectations of a 0.5% rise, with JP Morgan economist Ben Jarman reporting a “decent build up” in inventories in the retail and wholesale sectors.

“That’s probably as you expect, given the fact that consumer spending was not great going into the end of the year, so that would have resulted in a build up of inventories,” Jarman says.

NAB’s Quarterly SME Business Survey confirms retail and wholesale were among the worst performing sectors with regard to business conditions in the December quarter.

“Accommodation was the best performing SME sector, followed by transport, business services and finance… SMEs in finance significantly outperformed their larger counterparts,” the report says.

With regard to cashflow, SMEs in hospitality were the best performers followed by finance, transport and health.

“Turning to confidence by sector, there is a disparity in confidence among SMEs. The most optimistic sector overall was SMEs in the construction sector. The least optimistic sector was wholesale,” the report says.

According to the survey, SMEs are most concerned about borrowing costs and rising interest rates, tight credit conditions, and lack of demand. Other concerns include global economic uncertainty, tax and government policy, cashflow, and challenges in finding skilled staff.