Slow markets tip Reserve Bank to hold on rates

THE Reserve Bank's board has three more reasons to keep rates on hold at its meeting next month, says experts.

STAYING PUT: The RBA is expected to keep the official cash rate on hold at 4.75 per cent after the February 1 board meeting.

THE Reserve Bank of Australia board has three more reasons to keep rates on hold at its meeting next month.

Retail spending, construction and job advertisement data released yesterday all point to the fact that the Australian economy is losing momentum.

"Not only are manufacturing, services and construction sectors going backwards but retail spending is barely growing," said CommSec economist Savanth Sebastian.

"And now there are signs that the job market is stalling."

Finance markets yesterday were factoring in a 100 per cent probability that the official cash rate will remain on hold at 4.75 per cent after the RBA's February 1 board meeting.

HSBC economist Paul Bloxham said the RBA was achieving what it set out to do: slow growth in interest rate sensitive parts of the economy to make way for a mining investment boom.

"We continue to expect the next increase in interest rates to be in (the second quarter) this year," he said.

Retail sales figures for November rose a meagre 0.3 per cent to $20.328 billion, as cautious consumers watched where they spent their pennies.

Over the past year retail spending rose just 1.3 per cent, the second-worst performance in five years.

But the Australian Bureau of Statistics figures do not capture the growing number of consumers buying goods online from overseas, given a stronger Aussie dollar.

Mr Sebastian said the sluggish activity levels in the retail sector would need to turn around pretty quickly to justify a further rate hike before July.

"Rather it is more likely that retailers will need to continue discounting in coming months, especially given the economy was already struggling before the Reserve Bank delivered the November rate hike," he said.

The construction industry also shows signs of hurting, with house-building activity falling in December for the seventh consecutive month.

The latest Australian Industry Group/Housing Industry Association performance-of-construction index showed a rise in engineering construction, thanks to the mining boom, had helped slow the overall rate of contraction in December.

The index rose to 43.8 points from 42.2 in November, with a reading below 50 indicating the industry is shrinking.

AiG public policy director, Peter Burn, said the construction industry ended 2010 on a disappointing note.

"Businesses and home buyers continue to refrain from committing to new projects, with expectations of further rises in interest rates a likely factor," he said.

Bad weather, particularly in Queensland, reduced work in December although the full impact of the latest floods will not be seen until later in the year.

Another factor for the RBA board to mull over, is that out of the 16 job categories in the December Advantage Job Index, only two - engineering, and mining and human resources - recorded an increase in job advertisements.

The slide in job ads in the retail sector was a substantial 12 per cent in December.

Advantage Resourcing director Bob Olivier said higher interest rates still appeared to be influencing the jobs market negatively.