Rates stay on hold due to sub-prime wobbles: Economy round-up

The economy is strong, but a sharp eye needs to be kept on the sub-prime crisis. This is the message from the Reserve Bank of Australia as it decides to keep the basic cash interest rate unchanged at 6.75%.

In a statement accompanying the decision – the first time such a statement has been made when the RBA has maintained the status quo – Governor Glenn Stevens acknowledges that the RBA board is “concerned” about the outlook for inflation.

But, he says, widespread uncertainty about the impact of the international financial crisis on the Australian economy and the likelihood that banks will have to pass on further increased costs of borrowing to business and consumer borrowers will keep a lid on demand levels.

“Given the heightened uncertainty about the international outlook and the local trends in wholesale borrowing costs, both of which could have a bearing on inflation over the medium term, it [the RBA board] judged that the current stance of monetary policy should be maintained for the time being,” Stevens says.

The continuing strength of the Australian economy is highlighted in national account data released today showing that GDP increased 1% in the September quarter, in line with expectations.

The Australian economy has now grown 4.3% in the year to September, a three year high and almost twice the pace of this time in 2006.

The main contributors to the increase in expenditure on GDP were household final consumption expenditure of 0.7% and exports of goods and services at 0.5%, while the biggest negative contribution came from imports of goods and services.

Further signs of economic strength can also be seen in new Federal Chamber of Automotive Industries figures released today showing the number new cars sold increased 10.5% in November to 83,297. Over 960,000 cars have now been sold in the year to November, up 8.8% on 2006.

And the services sector also grew in November, with the Australian Industry Group – Commonwealth Bank performance of services index recording a rise of 3.2 points to 56.4, well above the 50 point line separating growth from contraction.

“The November results reveal robust growth outcomes right across the services sector, with eight of the nine sub-sectors recording an expansion in activity, as well as improvements in each state excluding NSW,” AiG chief executive Heather Ridout says.

On the markets today, at 12.10pm the S&P/ASX200 is down 0.5% on yesterdays close to 6498.6, following a weak lead from US markets overnight. The Australian dollar is trading at 87.01c, down on yesterday’s 87.55c close.