Builders want rate cut to stimulate industry

Official inflation figures out tomorrow could prove the final trigger for another interest rate cut when the central bank holds its first board meeting of the year on February 5.

But the building industry believes it will take more than another rate reduction to lift the sector out of the doldrums and help it fill the vacuum left by the mining boom coming off the boil.

Master Builders Australia's national survey of building and construction released yesterday shows industry conditions deteriorated in the December quarter 2012, despite 175 basis points of rate reductions since November 2011.

"Interest rate cuts over the past year appear to have failed to boost the confidence of new home buyers," Master Builders Australia's chief economist Peter Jones said.

He said the survey of more than 400 builders and contractors suggests that 2013 is unlikely to be the year the industry lifts from its current downturn and supports calls for short-term stimulus measures in conjunction with further rate cuts.

"The Reserve Bank has pointed to the building industry to help boost the non-mining sectors of the economy, but this does not look likely unless macroeconomic policy becomes more accommodating," Mr Jones said.

The survey's index that measures builders' own level of business activity fell again in the December quarter, from 47.4 to 45.2, remaining below the neutral 50 mark that indicates satisfactory levels.

The index is now below levels recorded during the 2008-2009 global financial crisis after a declining trend over the past two years.

Builders also reported a decrease in sales and profitability, and also expect to reduce their workforce in the period ahead.

The availability of credit has become a significant issue for builders looking to invest in new building projects, with 40 per cent of respondents saying this was having a major effect on their business.

Mr Jones said the federal government could no longer leave all the heavy lifting to the Reserve Bank of Australia (RBA).

"A short-term increase in the first home owner's grant for new houses and bringing forward civil works, combined with rate cuts, will go a long way towards restoring confidence," he said.

Economists' forecasts for tomorrow's December quarter consumer price index (CPI) centre on a modest 0.4 per cent rise after the surprise 1.4 per cent jump in the previous three months.

This would see the annual inflation rate at 2.4 per cent, comfortably within the RBA's 2-3 per cent target band.

More crucial to the interest rate outlook, underlying inflation is forecast to rise 0.7 per cent in the quarter for an annual rate also at 2.4 per cent.

National Australia Bank's chief economist for markets Rob Henderson believes such an outcome may not be enough for a rate cut in February.

"[But] we reckon 0.6 per cent or lower brings a February rate cut into contention - 0.5 per cent and they almost have to go," Mr Henderson said.

At this stage, financial markets are betting on a 30 per cent chance of a cut in the cash rate from three per cent to a record low of 2.75 per cent in February.



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