Rates on hold... for now

After the Board lifted the cash rate four times in 2010 – in total, by 1 per cent – many economists now believe the Bank will hold fire on rates for three or four months at least.

AMP’s chief economist Shane Oliver says not only is the cash rate considered to be mildly restrictive, but the threat of rising inflation has abated, lessening the need for the Board to act quickly on rates.

In addition, data from the Australian Bureau of Statistics reveal a slight drop in home sales and house prices, a fall in building approvals and continuing soft growth in private sector credit.

The number of new homes sold dropped by 0.2 per cent in November 2010, with detached house sales declining by 1.1 per cent. Worse still, in the three months to November 2010, new home sales dropped by 2 per cent to rest 11 per cent below the same quarter’s figure in the previous year.

Similarly, building approvals for new homes dropped 4.2 per cent in November 2010 – down 9.9 per cent over the course of the year.

Other dwelling approvals fell by 7.7 per cent in November and in the three months to November were down by 6.8 per cent on the previous three months. Approvals for detached dwellings fell by 2 per cent in November, down by 3.4 per cent over the November quarter.

It is not just the construction and sale of new homes that are suffering. Auction clearance rates have been falling steadily month on month and vendors are being forced to discount their properties heavily in order to secure a sale.

Home prices in Australia’s capital cities fell by 0.2 per cent in November, resting at more than 1 per cent below the peak recorded in May 2010.

But the news isn’t all grim. RP Data’s research director Tim Lawless says if the economists are right and the Reserve Bank does choose to keep the official cash rate on hold, dwelling prices may stabilise and grind out capital gains in excess of headline inflation, which is expected to breach 3 per cent by the end of the year.