After the release of the labour force and capital expenditure data in recent weeks, an interest rate hike in March was always going to be off the table.
My forecast from five months ago for a hike in March, albeit wrong, left me with a profit on trading given the market was pricing in an interest rate cut for all of that time. So a wrong call that makes money? I’ll take that.
The RBA announcement today highlighted its new found view that “growth is expected to strengthen, helped by continued low interest rates and the lower exchange rate”. Unlike many in the market, the RBA is clearly looking at the stellar housing activity (prices and construction), solid consumer demand, strong export growth, improving global conditions and a pick up in inflation to support this view.
These trends seem set to gain further momentum in the months ahead and if they get too strong, the RBA will have a difficult job reigning in persistent inflation pressures.
On the current soft labour market conditions, the macroeconomic management worry is probably quite low. Even the drover’s dog knows employment lags the business cycle which make the recent pick up in activity a shoo-in as a precursor for a pick up in employment in the not too distant future. Be patient.
As far as the Capex data go, the concentration of the slump in mining investment is well understood. It would be an issue of concern if the non-mining investment outlook wasn’t picking up or if exports, consumer demand or house building were not marching higher.
The fact that these areas of the economy are strong should be juxtaposed against the mining investment slump.
Bottom line GDP growth looks to be on track for 3.5 per cent or more by the end of 2014 and with it, an era of solid job creation beckons.
The RBA has in the past tended to be a little cumbersome in recognising important changes on momentum in the economy, but this time, it looks to be alert to the changes coming through. With that, it is reasonable to expect a more hawkish tone to its rhetoric in the not too distant future and then an interest rate rise within the next few months.