Some important data today with the October readings for retail spending and building approvals.
The retail data showed a tepid 0.2% rise after a 0.4% rise in September – not strong by any means and fitting with the very weak credit data released yesterday. Consumers appears to be content to keep a tight reign on retail spending, which is no bad thing from a medium term perspective, but in the near term it means significant risks of weaker growth, lower inflation and an uptick in the unemployment rate. The retail data are consistent with further disinflation pressures.
Of great concern is the collapse in house building approvals – down 10.7% in October and almost 25% in the last two months. From anecdotal evidence, the weakness in new building approvals could be linked to a lack of finance for building projects. But whatever the reason, it is an issue requiring remedial (monetary policy) action.
The data, together with the extraordinary central banks action overnight means the RBA will almost certainly be cutting interest rates next week. The debate is likely to be do they go 25 or 50 bps.
The fiscal tightening, weak commodity prices and risk of a zero inflation reading for the December quarter CPI will also be part of the discussion as will the ongoing resilience in CAPEX. Overall, it’s a tough call.
The best guess remains on a 25 bp cut in December, with lots more scope for cuts in the early months of 2012 once low inflation and softer growth are confirmed. But if the RBA knows that the banks will not be passing on any move in full, it may want to go 50 to ensure borrowers get some meaningful benefit.