Australian firms boost spending plans, rate rise seen

Investment by Australian businesses slipped unexpectedly last quarter but a sharp upward revision to spending plans supported policy makers' optimism about the economy and left intact the case for an imminent rise in interest rates.
The 3.9 percent drop in private capital expenditure for the third quarter initially knocked the Australian dollar lower as it seemed to lessen the chance of a rate increase at the Reserve Bank of Australia's (RBA) policy meeting next week.
Yet a big upward revision to spending plans for all of 2009/10 suggested the dip was the lagged effect of the global credit crisis and analysts were confident a revival lay ahead.
"The number we focus on is the forward looking component and spending plans were heavily upgraded for the fiscal year, which is very positive for the outlook," said Helen Kevans, an economist at J. P Morgan.
"That will have positive implications for employment and spending and probably add to inflationary pressures," she added. "We forecast a 25 basis point move next Tuesday."
The central bank holds its December policy meeting on Tuesday. If it lifts the 3.5 percent cash rate, it will be the first time it has tightened for three successive meetings.
One measure of market expectations from Credit Suisse put a 64 percent probability on a rise to 3.75 percent. December interbank futures imply a rate of 3.66 percent and further rises to 4.4 percent by June.
"Investment intentions for the coming year remain strong and help confirm the RBA's view that investment will be a strong driver of growth," said David Forrester, an analyst at Barclays Capital in Singapore.
"We do not think the data is weak enough to prevent them from raising rates by 25 basis points," he said. Overall, capital spending by private firms amounted to A$26.55 billion in inflation-adjusted terms in the third quarter.
Firms spent 2.9 percent less on equipment, plant and machinery, which will drag a little on gross domestic product (GDP) in the third quarter. Spending on buildings and structures dropped 4.8 percent but that was more than balanced by a big rise in public spending on schools, roads and the like, which was reported on Wednesday.