Why wouldn’t RBA cuts rates

An interest rate cut in August is just about assured according to most economists. A Bloomberg poll taken mid-month had 24 out of 25 of them saying it was a ‘certainty’. By the time the latest inflation figures hit it was two-out-of-three.

The inflation number showed 0.4 per cent growth in June giving a seasonally adjusted rate of 0.6 per cent which when translated into an annual figure comes out at 1.00 per cent well outside the RBA comfort range of 2.00 to 3.00 percent. The headlines seem to confirm a cut was on the way.

As I wrote recently the economy needs a little help. All the data crossing the desk is looking a little soft, i.e. unemployment, business lending, personal credit creation, and consumer confidence. And the Australia dollar is staying high as a buffer against low interest rates around the world. The only bright spot is the export prices are finally moving up across a range of commodities but nowhere need as steep as they fell over the past two years.

So what will the RBA do? Next Tuesday’s meeting coincides with similar meeting of the Bank of Japan and the Bank of England. Both are expected to cut rates or shower money on the economy in one form or another.

So why wouldn’t the RBA move? It could well consider that it might be advantageous to keep its power dry as the other central bank moves rates into negative territory, thus leaving them exposed to another banking crisis.

And a quarter of a percent move might not be enough to get things moving in any case.

The RBA could also be advised to see what happens in the United States with the Fed board there hinting it might lift rates before the end of the year as economic growth starts to lift inflation.

That should have the effect of sinking the $A back to its comfort zone around A72c.

The key might be the that improvement in the terms of trade which rose around 2 per cent in June following a 1.4 per cent rise in export prices. Import prices fell by 1.0, which helps explain the weak inflation number.

Glad I’m not making the decision next Tuesday.

 THE GREAT AUSSIE HOTEL BOOM

One of the really bright spots on the export scene is the growth in tourism (another reason to keep the Aussie dollar low). It generates a lot of money and a lot of jobs, albeit not the highest yielding in the land. But now it’s also generating a construction boom, which might bridge the gap between the end of the apartment boom and the beginning of the much heralded infrastructure boom.

According to hotel consultant Dransfield Hotels and Resorts more than 8000 hotel rooms are under construction across Australia, with the possibility this could stretch to almost 30,000 rooms, as long as record numbers of overseas and domestic travellers keep coming.

Researcher BIS Shrapnel also told  the big Sydney hotel conference that the value of accommodation construction would peak at more than $2.2 billion in 2016, and remain elevated in 2017 and 2018.

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