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RBA November rate rise premature: BIS Shrapnel

The Reserve Bank's rate hike of 0.25 per cent on Melbourne Cup Day in November could have been "premature", argues BIS Shrapnel.

The economic forecaster says while the RBA is concerned about the mining boom and strong employment growth leading to serious capacity constraints and inflationary pressures, the latest BIS Shrapnel Economic Outlook Bulletin shows the recovery in the Australian economy is still fragile.

"The RBA should have waited and kept its powder dry," says report author and BIS Shrapnel senior economist, Richard Robinson. "The economy will experience these pressures, but they will manifest later, not next year, and the effects of this mining boom will be different to the pre-GFC resources boom."

BIS Shrapnel says the dwelling recovery hasn't started and upgraders and investors have been "scared off" by rising rates. Consumers are also cautious with retail spending weak despite strong employment growth and people are also saving rather than spending.

And except for mining, business investment is "plagued by high costs, and unavailability of finance", which has affected business confidence, especially where rising interest rates and a high dollar are a concern.

BIS Shrapnel also says the housing and tradeables sectors have become the "collateral damage" of the mining boom.

"While the RBA is aware of the effects on housing and the broader economy, its charter is to keep consumer inflation in a two-to-three per cent band over the medium term," says Robinson. "As it has no control over a rampant mining boom, the RBA effectively acts to curtail other sectors to make room for mining - housing and the tradeables sectors thus become the ‘collateral damage' of the mining boom."

Robinson believes derailing the housing recovery isn't sensible as there is "serious deficiency" in housing, and approvals data is "well below underlying demand".

"The latest rate rise will mean a further delay in this much needed upturn," says Robinson. "The worsening deficiency of housing could potentially lead to major problems down the track, including higher rental and housing inflation, which could push up the CPI, and the potential for overpriced real estate and boom-bust residential cycles.

"Furthermore, we'll need a lot more housing to cater for increased migration in the medium term, which ironically will be required to supply labour to the mining investment boom. With public investment being wound back and the mining boom not yet fully hitting its straps, there is now a window of opportunity for higher levels of dwelling building."

BIS Shrapnel expects employment growth to fell from around 3.5 per cent to 2.5 per cent. It also says the RBA may not raise rates until at least the middle of next year or beyond. The RBA Board meets today with the rates decision scheduled for release at 2:30pm.

Andrew Brown - Switzer