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Rates to stay put?

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by Peter Switzer

As the Aussie dollar appreciates, with parity only likely to be a brief pit stop before heading higher, anyone in business not cheering the currency’s defiance of gravity has to be hoping that their potential customers are champing at the bit to spend.

On the one hand, these hopeful business owners would have liked news from the Westpac-Melbourne Institute index of consumer sentiment. However, the latest update on the predicament of those in debt does not make great reading and poses very real questions about what more interest rate rises could do to these struggling Aussies.

The October consumer sentiment reading rose 3.3 per cent to 117.0 and is comfortably above 100, which means optimists outnumber pessimists. The index is 2.5 per cent higher than its 2010 average, which is a comforting sign and the rise this month slightly offsets the five per cent slump in September.

That month had federal government uncertainty to contend with and a virtual hallelujah chorus of economists tipping rates will rise by 0.25 per cent in October. And worse still, the stories of 1.25 per cent of rises were pencilled in for the 15 months to the end of next year.

Customers bounce back

You wonder why consumers were spooked. But then the RBA shocked everyone by holding fire and what do you know — consumers bounce back.

"There were many reasons to expect the index to bounce back from the surprise five per cent fall in September," Westpac chief economist Bill Evans said in a statement on Wednesday. "The decision by the Reserve Bank to keep rates on hold at its October board meeting would have buoyed consumers.”

While we are being positive, one reading in this Westpac consumer survey that would have made retailers smile and the Reserve Bank frown was the household confidence component, which spiked 9.9 per cent in October.

This is now at the highest level for more than five years, which means that these consumers eyeing off a big ticket item for Christmas, are more positive than they were in the boom times before the GFC struck fear into us all.

The two speed economy

But Australia is a two speed economy and according to credit agency Veda Advantage 17 per cent of Australians in debt struggle to repay debts and many are experiencing financial hardship.

Veda Advantage’s bi-annual Australian Debt Study “reveals 2.1 million Australians are struggling to repay debts and many have to sell assets, rely on family or friends, transfer debt, or even skip meals to repay money owed.”

The survey found 85 per cent have had to cut back on aspects of their lifestyle to repay debts and around 475,000 Australians have sold assets to repay debt.

Some 912,000 have had to cut back on necessities such as groceries while 700,000 Australians have received financial assistance from family or friends.

To raise or not to raise

But what is even more worrying as the chorus of economists again call for interest rate rises, as the dollar indirectly tightens monetary policy, is that 15 per cent of Australians who are currently struggling to repay their bills are looking to take on more credit in the next six months.

This comes as the latest NAB business confidence index actually fell from 11.2 to 10.1 in September.

Putting this all together, if the inflation reading on 27 October is better-than-expected and the dollar is still punching higher, there will be a very good reason for the RBA to hold back an interest rate rise knockout blow to 2.1 million Aussies, as well as a whole lot of businesses.

For advice you can trust, contact Switzer Financial Services.

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Published on: Tuesday, October 19, 2010