You are using an older browser version. Please use a supported version for the best MSN experience.

Economists examine RBA policy

AAP logoAAP 5/08/2016 Garry Shilson-Josling, Economist

The attention of economists was squarely on the Reserve Bank this week.

Building approvals and foreign trade figures provided the curtain-raiser for an anticipated interest rate cut on Tuesday.

For St George Bank's Janu Chan, a small fall in residential building approvals in June just added more evidence that home building is at or very near its peak.

Activity will plateau for the time being at relatively high levels, Ms Chan said.

"However, the positive impact of housing construction on economic growth will likely weaken over the coming 6 to 18 months," she said.

Also on Tuesday came figures suggesting foreign trade added nothing to economic growth in the June quarter, to be revealed in the national accounts on September 7.

"When combined with last week's trade price indexes, today's data suggest net trade is likely to be quite neutral from a real GDP perspective, a material turnaround from 1Q where net trade contributed a booming 1.1 percentage points," he said.

Two hours after the release of the figures, the RBA cut the cash rate to an all-time low of 1.5 per cent.

National Australia Bank's Ivan Colhoun, one of the few who had not tipped a cut this month, described it as "one for the road".

He does not think another is in the pipeline, but won't rule it out.

"Should the economic outlook fail to improve or deteriorate, the inflation outlook continues to provide scope for further rate cuts in Australia," he said.

In a report titled "Cutting With Clenched Teeth", Commonwealth Bank economists Michael Workman and Kristina Clifton described the RBA board as "reluctant cutters".

"Inflation trends are unusually low and are forcing more rate cuts, just to keep 'real' rates stable near zero," they said.

And with inflation trending well below the RBA's two to three per cent target range, there is room to cut the cash rate further, with another cut likely this year.

"It's not really about the activity data. It's about the lack of wages and inflationary pressures," Workman and Clifton said in their report.

"We can try and force a higher growth rate because the inflation risks are not to the upside, but to the downside."

Those risks were reinforced by figures from the Australian Bureau of Statistics on Thursday showing retail turnover rose just 0.1 per cent in June, a result ANZ economist Jo Masters described as disappointing.

"Today's data highlight some underlying fragility in the economy and reinforce the appropriateness of ultra-easy monetary policy settings," she said.

And that outlook was underscored further by the RBA in its quarterly monetary policy statement on Friday.

Royal Bank of Canada economist Su-Lin Ong homed in on the RBA' forecasts that did not return inflation to the two to three per cent target range over the forecast horizon through to end-2018.

"This confirms a clear easing bias and, despite recent policy action and an historically low cash rate, points to the likelihood of further action," Ms Ong said.

But, like her counterparts at the Commonwealth Bank, Ms Ong said the RBA would prefer not to cut if possible.

image beaconimage beaconimage beacon