Business News

More rate rises ahead?

| More

by Peter Switzer

Is the Reserve Bank starting to crack on interest rates? Maybe we won’t we see interest rates go up four more times this year?

That was my hopeful conclusion following an interesting comment from Guy Debelle, the Assistant Governor of the RBA to a parliamentary committee yesterday.

And it came when new home loan figures out yesterday showed that the RBA’s aggressive interest rate rise policy is biting big time and probably pricking the house price bubble that Glenn Stevens — Kochie’s mate, the RBA Governor — is so worried about.

Home loans fall

New home loans fell for the seventh time in eight months in February, down by 1.8 per cent to the lowest level in 16 months. And it has spooked new purchasers with the proportion of first home buyers has hit a 20-month low.

CommSec says the number of home loans in South Australia fell to nine-year lows in February while Tasmanian home loans fell to near decade lows.

And I loved CommSec’s Craig James’s take on the figures, which rubbed it in to the RBA.

“If there ever was an emerging housing bubble – and there wasn’t – it has been successfully deflated,” he wrote. “Home lending has fallen in seven of the past eight months and further weakness may lie ahead in response to rate hikes in March and April. The Reserve Bank should now feel comfortable in moving to the interest rate sidelines to gauge the impact of recent rate hikes on the broader economy.”

Business and consumer confidence

Many other economists are in the 'Big Bank needs to pause now' camp and if they do it would be a good thing. I have never seen so many people expecting three or four more interest rate rises in a year and the very clear expectation apparently is scaring consumers and business.

We get the NAB business confidence reading today but it’s for March, which means the reaction to the last rate rise won’t be in these figures.

The more interesting number will be the Westpac consumer sentiment figure on Wednesday, which will show what the last rate rise has done to confidence.

Housing is key

Economic recoveries need a healthy housing sector and worryingly construction loans fell by three per cent. And the value of new housing commitments (owner occupier and investment) fell for the fifth straight month, down by 3.4 per cent in February. The proportion of first homebuyers in the market fell to a 20-month low of 18.1 per cent in February, down from 20.5 per cent in January.

Fighting words

Historically, you wouldn’t expect the RBA to raise rates in May before a Budget, but I reckon Glenn Stevens would — he is no pussy. But it looks like enough is enough.

As James put it: “The Reserve Bank now has plenty of reasons to pause in its process of restoring rates to ‘normal’ levels. Not only is housing lending sliding, but retail spending, building approvals and gauges of construction, services and manufacturing sector activity have been soft in the past few months. It may prove temporary weakness of the economy, but for the Reserve Bank, it should be a case of being safe, rather than sorry.”

I love fighting words and you don’t often get them from banking economists to the RBA, and these are very respectful fighting words, but they do suggest it is high time Stevens sat back and saw how damaging or successful his work has been to date.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer and Paul Rickard the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

Published on: Tuesday, April 13, 2010