LA Private

Yet another rate rise now looking more likely

Odds are tightening that the Reserve Bank will lift interest rates at its June meeting next Tuesday after a solid rise in house prices last month, slightly better than expected capex and construction spending data more than offset confirmation of weakening retail sales.

After the controversy of May’s rate rise most analysts reckoned the central bank would adopt a wait and see approach, like it did in April.

Last Friday’s preliminary retail sales figures for April confirmed that the slide very evident since late 2022, was continuing and, if anything, worsening as Australian cut their spending on food for the first time in more than a year and spent less outdoors at cafes etc for the first time in six months.

The final retail sales data for April showed an annual rise of just 4.2% in the quarter, well behind the 6.5% rise in the monthly inflation indicator (excluding petrol). It was also well behind the 7.9% rise in food and beverage costs in the year to April.

That left analysts thinking no rate rise – but the rise in house prices in May has seen the market’s belief change and more than a few economists and analysts concede a rate rise next Tuesday may happen, but don’t think so.

May saw the rebound in Australian home prices accelerate with national average home prices up 1.2%, their strongest pace since November 2021 and their third monthly rise in a row. They are now up 2.3% from their February low.

Sydney continues to lead the charge with a 1.8% gain, taking average prices up 4.8% from their January low.

The AMP’s Shane Oliver says the culprit is the combination of high immigration and constrained supply which are (for now) “dominating the negative impact of higher interest rates.”

“It’s also the case that the RBA has now on several occasions referred to the rebound in property prices as being a potential concern. In other words, the rebound in home prices could itself spur the RBA to raise interest rates more than it otherwise would have done because rising home prices could drive a positive wealth effect offsetting its efforts to try and slow consumer spending down,” he warned.

“However, the risk of another down leg in prices remains high as interest rate hikes continue to impact and the economy slows – with a now very high risk of a hard landing for the economy,” he warned.

Thursday saw the private investment data for the March quarter and for the new 2023-24 financial year a bit stronger than expected. Private investment rose 2.4% in the three months to March, stronger than the 1% forecast but weaker than the 3% rise in the December quarter. Capex was up 6.4% in the year to March, which is just behind inflation of 7%, so there was a fall in the value of capax in real terms.

Spending on engineering (which influences the GDP figures) rose a strong 3.7%.

The second estimate for the new financial year was 6.4% above the second estimate a year ago for 2022-23 at $138 billion, the highest second estimate for more than five years.

Wednesday saw the value of construction work in the March quarter rise 1.8% – better than the 1% rise forecast and despite another quarter of falling spending on residential which fell 2% in the three months and 5.1% over the year.

A sharp downturn in Australian building approvals deepened further in April, sparking fears that the slowdown could push the economy closer to a recession, while at the same time stoking rents and keeping inflation hot.

Building approvals fell 8.1% in April, well below expectations by economists for a 2% rise, marking the lowest level of permits since 2012. Total approvals are now down 24.1% compared with a year ago, according to data published by the Australian Bureau of Statistics on Tuesday.