Funnily enough there’s not to much attention being paid to today’s meeting of the Reserve Bank board which will consider the level of interest rates one last time for 2016.
And that is funny because it will be a bit of an anticlimax after all the noise and excitement this year about interest rates, especially after the RBA cut rates twice and lots of economists forecast more cuts (which failed to happen).
While increases in fixed rates for investors from Westpac and NAB grabbed the headlines, most in the markets preferred to focus on the National Accounts for the September quarter and their GDP reading.
Westpac and National Australia Bank both raised interest rates for some home loan customers, a move driven by higher funding costs since the election of Donald trump as US President sent global bond yields surging higher.
The NAB said it would raise its standard variable rate for housing investors by 0.15 percentage points to 5.55%, a move that will affect both new and existing customers, while Westpac will lift interest rates for all its customers with interest-only home loans by 0.08 percentage points. The change will also affect new and existing loans, for both owner-occupiers and property investors. The increases will make the RBA happier about what is happening in the housing market where just Sydney is holding out against the downward pressures on prices.
With lending to investors down 16% from a year ago in October, the higher rates (the ANZ and cBA have also lifted some fixed rates in recent weeks), will make it less attractive to invest in housing.
And the central bank will not need to worry about an interest rate movement for the time being as a result, even though it knows the September quarter GDP report on Wednesday will be weak.
The bank won’t be worrying about the current quarter either, but the March and June quarters of 217 are likely to see two very low readings as stronger quarters in the past year fall off the comparative base and produce a picture os a sharp slide in growth.
But first we have to get through the September quarter figures yesterday and the only good news (for GDP) from the business indicators was a rise of 0.8% in the quarter for business inventories, the first big rise for over a year.
Wages and salaries continued to grow, but at a slower rate in the June quarter when they surprised on the upside. And company profits rose just 1% last quarter, a third of the pace forecast by economists and underscoring weak business investment.
As a result, economists expect the economy grew just 0.2% in the three months to September 30, down from 0.5% in the previous quarter. If this happens it will take annual growth to 2.5%, or well below the RBA’s latest forecasts of around 3% and 3.3% in the year to June.
A number of economists including NAB and Morgan Stanley are even predicting the first quarterly contraction since the march quarter of 2011 when growth fell by 0.2% (originally reported as a fall of 0.9%).
But most analysts say the RBA will look through any slowdown, seeing it as more of a one-off quarterly result, coming after strong growth in the first half of 2016 and as the recent surge in key commodity prices works its way into the national accounts.
"We expect that the weakness in GDP will prove shortlived," said ANZ head of Australian economics Felicity Emmett, adding that Friday’s solid retail sales numbers showed momentum "improving sharply" into the fourth quarter, while housing construction was likely to rebound given the amount of work still in the pipeline.
"At (Tuesday’s) RBA board meeting, we expect much discussion will revolve around the labour market and the ongoing weakness in wages growth."
The AMP’s Dr Shane Oliver wrote at the weekend "While recent data points to soft September quarter GDP growth to be released on Wednesday this is unlikely to be enough to move the RBA to cut rates given recent upbeat commentary on the economy from both Governor Lowe and Assistant Governor Kent.
“However, as noted above we remain of the view that the RBA will cut rates again in the first half of next year reflecting downside risk to both growth and inflation,” Dr Oliver wrote.
On the data front in Australia, Dr Oliver sees the September quarter GDP growth on Wednesday at just 0.2% quarter on quarter, or 2.5% year on year (3.3% in the year to June) driven by weak business investment, retail sales, housing investment and trade.
However, he warned that there is also “a high risk of a fall in GDP."
