Reserve Bank of Australia

Mortgage Interest rates tipped to remain steady as RBA has flagging economy and drought to think about.

Good news for those in the Mortgage belts of Brisbane, Sydney and Melbourne the Reserve Bank of Australia is set to keep interest rates on hold today, with data showing the economy is being weighed down by drought conditions and less than ideal economic growth.

Data shows the economy continues to slow into the December quarter, with the Australian Industry Group-Commonwealth Bank performance of services index (PSI) falling 3.5 points to 48.5 in November. It is the third month of contraction this year in one of the biggest sectors of the economy — services.

The deterioration reflects falls in employment, inventories and supplier deliveries. A moderate boost in sales growth could partly offset flat growth in orders. Almost all sectors reported a loss of momentum in November. The only exception was retail — and it was only set apart by the fact that activity was declining at a slower pace.

Commonwealth Bank chief economist Michael Blythe said: "A combination of rising interest rates, falling consumer confidence, the extended period of high petrol prices and worsening drought are all taking their toll on service-sector activity. Significant headwind will continue to buffet the economy as we move into 2007."

The data coincides with the Australian Bureau of Statistics estimating that the growth in net exports will add 0.4 per cent to September-quarter gross domestic product growth.

But ANZ estimates that this would simply offset the fall in domestic activity, delivering zero growth for the quarter.

The ANZ forecasts, though, are more negative than the consensus figures from economists.

With the Reserve Bank having held its last meeting for the year yesterday, economists were tipping that today's GDP figures will show the economy growing at an annual rate of just 2 per cent. Growth from the previous quarter will be 0.4 per cent.

This signals a significant slowdown into 2007, a critical year with a federal election looming. Over the past 15 years, the economy has grown at an average of 3.6 per cent a year.

CommSec economist Craig James said yesterday's data showing an improvement in the trade situation was just a "hollow victory", because the lower current account deficit was not so much due to more exports but because of lower imports, reflecting a weakening economy.

"A 2 per cent annual growth rate means Australia is … significantly underperforming most other developed economies."

A measure of interest rate expectations, the market for 30-day bank bills futures, suggests the market is betting on only a 6 per cent chance, at most, of another rate rise by March.

Adding to the grim news is data showing that extreme drought conditions are forecast to cut 2007-07 winter grains production by 62 per cent from last season to 15.5 million tonnes, the lowest level in 10 years.

Source the Age, Leon Gettler