Mortgage holders are not likely to receive a handout this week, as a revitalised inflation is likely to keep the Reserve Bank from reducing interest rates in the near future.
Contrasting forces of the increasing consumer prices and the increasing unemployment are tugging the RBA monetary policy board in different directions, and this means that the bank will decide to sit back and wait until they have more data, according to analysts at Japanese investment giant Nomura.
The main changes since the previous rates meeting in September, according to Andrew Ticehurst and David Seif, include a resemblance in that the latest unemployment rate has risen sharply since September, and the latest inflation rate was far beyond the expected levels.
With this data pulling the RBA in different directions, policy-wise, they opined in a research note that the best alternative is probably the do-nothing option.
Using historical data to draw rates was like driving through the rear-view mirror and increased the chances of policy error.
“But on the other hand, we do not know”, said Mr Ticehurst and Mr Seif, “there is a better way.”
Now that the economy is growing at an almost trendy pace, the policy rate is now likely to be near the undefined neutral rate, and policy changes, now likely to be made only in small steps, the cost of any resulting error, hopefully, will not be great.
It is unanimously expected that the Reserve Bank will leave rates unchanged on 4th November. The future action will depend on the tone of the statement made by the board, the post-meeting conference by Governor Michele Bullock, and revised economic forecasts, which are released at the same time.
NAB senior economist Taylor Nugent predicts that the board will highlight the necessity to wait a little longer to earn more confidence regarding the way forward with inflation. “We anticipate that caution would put the RBA on a long hold and scanty advice on the way forward as they continue to receive more information regarding the dynamics in the labour market and inflation.”
Although the Commonwealth Bank now believes that the central bank has ceased the easing cycle, Westpac still anticipates two additional cuts next year, but later than it had anticipated earlier.
“The monetary policy remains to some extent restrictive,” according to Westpac chief economist Luci Ellis, a former RBA chief economist.
More reductions on the cash rate in the coming year are hence justified as underlying inflation will not leave the band and will be decreasing in the next few quarters.
The Australian Bureau of Statistics will also come up with information on consumer spending, building approvals, and trade this week.
Following a decline in growth over the last two months, ANZ economists forecast that household spending has recovered in September, with Monday figures estimated to be 0.4 per cent.
“On Monday, ABS is also likely to report an increase in building approvals by four per cent in the month,” says ANZ Madeline Dunk.
Existing houses (units/townhouses) in private dwellings are down 32 per cent in the last two months, hence we expect that there will be a recovery in September.
In other locations, the Monday home value index of Cotality is expected to experience an additional increase in the property values across the country.
Investors on Wall Street, in turn, appear to be concerned that the Federal Reserve is becoming more conservative in its quest to lower US rates.
Friday saw the major New York indices sell off, in part due to optimistic earnings expectations by Amazon, but it was a poor mood.
The Dow Jones Industrial Average was 40.75 points, or 0.09 per cent, to 47,562.87, the S&P 500 was 17.86 points, or 0.26 per cent, to 6,840.20, and the Nasdaq Composite was 143.81 points, or 0.61 per cent, to 23,724.96.
Australian share futures dropped by five points or 0.05 per cent to 9,913.
S&PASX200 fell 3.6 points on Friday, or 0.04 per cent, to 8,881.9 with the wider All Ordinaries falling 0.9 points, or 0.01 per cent, to 9.178.
