Weak building approvals figures and the central bank governor’s frustration over persistently poor business confidence have increased expectations of an interest rate cut next week.
Approvals for the construction of new homes fell for a second month in a row, down 6.9 per cent in June, seasonally adjusted, the Australian Bureau of Statistics said on Tuesday.
A couple of hours later, Reserve Bank of Australia governor Glenn Steven gave a speech, where he talked about the transition of the Australian economy away from one driven by the mining and resources boom.
Mr Stevens said more optimism about the economy would be one of the ingredients needed for activity in the non-mining sectors to pick up.
“It is somewhat concerning that the business community’s confidence has been quite subdued in recent times,” he said.
One way to solve this lack of confidence would be for the RBA to cut its cash rate to stimulate growth, and lower interest rates would also encourage home buyers to invest in new homes.
Commonwealth Bank senior economist Michael Workman said he expects the RBA to cut the cash rate next week.
“The current upswing in approvals, and construction, looks set to be relatively mild compared to previous ones which came with considerably more stimulus to first home buyers than the current cycle,” he said.
“That lack of broad-based (taxpayer-funded) cash stimulus also helps explain why capital city house price rises are still in the single digit range.”
The futures market is now pricing in an 89 per cent chance that the RBA next week will reduce the cash rate by a quarter of a percentage point, from 79 per cent on Monday.
HIA senior economist Shane Garrett said the June building approvals figures showed that the sector’s recovery needs some help.
“There had been some signs in earlier months that a housing recovery was underway but today’s figures put a large question mark over that,” he said.
“While there is no single solution to the housing industry’s difficulties, today’s figures surely make it imperative for the RBA to cut rates next week.”
However, CommSec economist Savanth Sebastian said the building approvals figures were not concerning, even if they sparked speculation about the state of the home building sector.
“It really is a volatile reading,” he said.
“What it really highlights is we’ve got normal levels of building across the economy.
“The RBA will certainly be looking at the housing sector very closely, but I don’t think these numbers will be the defining reason why the Reserve Bank cuts rates.”
The RBA cut the cash rate four times in 2012 and again in May, by a quarter of a percentage point to a record low of 2.75 per cent.
