For a more comprehensive round up of the week, listen to Stephen’s full report here.

The Australian economic releases and surveys released in November continue to show that the economy has been growing below potential (3.1% average annual GDP growth), but not quite as far below potential compared to a month ago. Several key economic readings released over the past month for September were stronger than expected including owner-occupier housing finance commitments, up 4.4% m-o-m; home building approvals, up 14.4%; retail sales, up 0.8%; and a narrower than expected international trade deficit of $A284 million built partly on a continuing improvement in exports, up 0.5% m-o-m. Set against the broad range of stronger readings was one notable disappointment, October employment rose by only 1,100 (market consensus +10,000) drifting the unemployment rate up to 5.7% from 5.6% in September.

Official forecasters such as the OECD and the RBA are being particularly cautious about the recent improvement in Australian economic readings, concerned that the pick-up in domestic spending is likely to only barely cover the fall in mining investment spending over the next year or so. As a result, both the OECD and RBA downgraded their forecasts of Australian GDP growth to respectively 2.6% and 2.5% for 2014, relatively pessimistic given the way recent economic readings are developing internationally and in Australia. Both are likely to be watching the data for many months to come before feeling confident enough to upgrade their growth forecasts. The implication in our view for the RBA, leaving the cash rate unchanged again at a half-century low of 2.50% at its early November policy meeting, is retention of a bias towards cutting the cash rate further, but probably no move on the cash rate until the second half of 2014 at earliest. By then we expect that the RBA will be convinced that the economy is improving making the next cash rate move a small hike probably late in 2014.

Other areas where the RBA has been vocal in November concern rising house prices and the relative strength of the Australian dollar. At the beginning of November the Australian Bureau of Statistics released its Q3 house price index showing house prices up by 1.9% q-o-q, 7.6% y-o-y, but Sydney house prices up by 3.6% q-o-q, 11.4% y-o-y. Private surveys point to further increases in house prices in October mostly driven by investors. In various comments, the RBA has indicated that what is happening to house prices is a normal cyclical development and is not indicative of a bubble, mostly because there is no evidence of any excessive increase in housing credit driving the rise in house prices. Nevertheless, the RBA is cautioning borrowers not to overextend on the basis of unrealistic expectations about future increases in house prices as well as cautioning lenders not to relax their lending standards. At this stage, developments in the housing market are a long way short of the booming conditions in 2002 and 2003 that led the RBA to lift interest rates mostly to tame housing asset price inflation.

The RBA is also making it plain that it is unlikely to use the cash rate to influence the value of the Australian dollar. RBA Governor Stevens spoke last week marking the 30th anniversary of floating the Australian dollar and indicated that the float had been one of the more important economic reforms enabling the adoption of modern monetary policy practice based on setting the cash rate, acting as a buffer to income changes from swings in Australia’s terms of trade and making a major contributions to much less volatility in key macroeconomic variables – growth, inflation and unemployment – than was the case before 1983. Using the cash rate to influence the currency means the RBA compromises one of the big benefits from the float, an independent monetary policy. Governor Stevens did not rule out the possibility of intervening in the foreign exchange market if the Australian dollar fails to fall as it should on the basis of the declining terms of trade, but he indicated reluctance to do so given that intervening implies giving up Australian interest rates to receive near zero interest rates overseas a considerable cost to revenue.

All told, it seems very unlikely that the RBA will use the cash rate either to tame house prices (the RBA does not see a problem yet that needs taming) or use the cash rate in the opposite direction to push the currency lower (it flies in the face of the considerable benefits the RBA believes have accrued from the float over the past 30 years). A stable, very low cash rate looks set to last for many months to come and in a slowly improving economic climate that looks set, in our view, to continue to favour risk assets including credit.

Our next economic roundup article will be on Monday 23rd December.