Odds of rate cut firm

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The chances of a rate cut next week appear to be higher after two sets of weak local housing data.

Following hot on the heels of yesterday’s announcement that house values slipped by 0.5% in April, today the Australian Bureau of Statistics (ABS) has released data that shows building approvals fell 5.5%, seasonally adjusted, in March – much weaker than economists had expected.

Economists had forecast a 1.5% rise in approvals for March, and it now appears the 2.8% rise recorded in February was a ‘furphy’, with dwellings approved falling in the first three months of 2013 in trend terms. The ABS does warn that ‘seasonally adjusted’ data can be more volatile and ‘trend terms’ are a more reliable indicator.

Looking at the states, New South Wales, Victoria and Tasmania all saw falls of more than 3%, while Queensland, Western Australia and South Australia increased in trend terms.

The slump in approvals will likely give the Reserve Bank of Australia more ammunition to cut the official cash rate below the current level of 3%.

Builders and building materials companies have been suffering for some time, and many had hoped that the RBA’s 1.75% in cuts since November 2011 would spur the housing market. That appears to have been a false hope, shown by building materials company Boral Limited (BLD.AX) announcing that it was cutting 100 jobs, and last month said it expected difficult conditions to remain in the near term. James Hardie Limited (JHX.AX) reported in February that conditions in Australia remained subdued.

Plumbing and bathroom products supplier, Reece Australia Limited (REH.AX) recorded a 5% fall in net profit for the six months to December, blaming the result on ‘challenging’ trading conditions. Likewise building fixtures and fittings company, GWA Group Limited (GWA.AX) saw a 24% fall in net profit for the same period, also blaming the result on ‘weak’ trading conditions.

Foolish takeaway

Economists have also warned that the RBA may need to cut rates to offset the impact of the rise in the Medicare levy to pay for the National Disability Insurance Scheme. All the pointers suggest the RBA may cut rates as early as next Tuesday.

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More reading

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