The Distillery: RBA housing hurdle

Jotters generally think the Reserve Bank will maintain its easing bias for a while, but one says a housing bubble could indirectly get in the way of further cuts.

The September Reserve Bank board meeting may have been little more than a token event given an election was just days away, but this week’s will carry more interest. However, despite the greater freedom it will have to act, most commentators think the board is unlikely to use it. The consensus remains that one more rate cut is still on the cards in the next few months, but will a housing bubble derail this school of thought?

Elsewhere, there’s plenty of discussion about the latest budget numbers, which weren’t as bad as expected. Despite this, one columnist warns that a budget black hole could still be lurking around the corner.

We start with interest rates. The Australian’s David Uren is confident the Reserve Bank will stay put on Tuesday, but not due to any concerns about perceptions of a housing bubble. Instead, it’s all about jobs.

“While the bank has adopted a fairly neutral stance, it has very deliberately not ruled out further rate cuts and would be concerned if the rise in unemployment looked like accelerating. But if a more buoyant housing market stimulates construction activity and lifts consumer confidence, the Reserve Bank would see it as monetary policy working precisely as it should. Rising house prices themselves won't stand in the way of further rate cuts, but their indirect benefit on jobs and growth might.”

The Australian Financial Review’s David Bassanese takes a similar line, noting that the threats to the economy still outweigh the risk of a house price boom.

“Despite mounting hysteria over house prices, indicators of consumer spending, business conditions and labour hiring still suggest the economy remains trapped in a below-trend rut, and the unemployment rate is destined to rise further ... Accordingly, I suspect the Reserve Bank will still retain a modest easing bias in its policy statement this week, holding out the prospect of even lower interest rates in coming months, should inflation stay low and unemployment rise further.”

Moving to the final budget numbers from last year, Fairfax’s Michael Pascoe is full of praise for the delivery of a deficit in 2012-13 being far smaller than it could have been. Treasury, he insists, is worthy of acclaim for reducing the deficit while avoiding recession in a turbulent political environment.

“After a deficit of $43.4 billion the previous year – 2.9 per cent of GDP – it is an unprecedented and utterly amazing fiscal contraction to be able to get it down to about $19 billion, 1.3 per cent of GDP. Thank heavens Wayne Swan didn't succeed in reducing it to zero – that way recession would have laid.”

Terry McCrann, writing for The Weekend Australian, takes a different focus by putting the spotlight on budget black holes. Are some lurking a couple of years down the track?

“In the more general sense, we know we've got a ‘budget black hole’. It's set out in all its blackish redness in the Pre-Economic Fiscal Outlook. If this year's deficit is now heading for $35 billion rather than $30 billion, that in itself is really not of great significance … The important question is not whether this year's deficit is $30 billion or $35 billion, but what next year now looks like; and how the bottom lines for the years after that are shaping up. We could well be facing real budget black holes.”

Sticking with Canberra, Fairfax’s Ross Gittins calls for Treasurer Joe Hockey to pursue bold budget reform rather than merely coasting into a position of being “better than the last lot”. The easy choice is rarely the best choice, after all.

BHP Billiton, meanwhile, has drummed up some news for its stance on executive pay. Terry McCrann, this time writing for the Herald Sun, notes just how complicated pay structures have become. And even with pay cuts ahead, the money that leading execs will receive is still at levels most people wouldn’t see in their lifetime.

Finally, Fairfax’s Malcolm Maiden talks retail – specifically, the closing of the price gap between David Jones, Myer and the online retailers. But while that problem is not as gaping as it appeared a year ago, retailers still have plenty of issues to deal with – not least of which is lacklustre sentiment.

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