Case for Cup Day rate rise strengthens

As if the risk of another hike in official interest rates wasn’t already high after last week’s inflation figures, latest economic data suggests there is little chance the Reserve bank won’t lift rates again in the coming week.

Borrowers should brace for a 0.25 percentage-point rate rise to be announced on Wednesday which would be passed on to retail loans and take the mortgage rate for most borrowers over 8 per cent.

Building approvals took a surprise jump in September, at odds with the string of flat results in recent months which have had the housing market in the doldrums. A 6.8 per cent rise was well above expectations, but was largely on the back of a spike in apartment approvals. It’s only one month’s figures but the construction market does cautiously appear to be trending up, giving the RBA more food for thought.

Retail sales posted another healthy result in September, 0.8 per cent growth in turnover and 1.9 per cent in volumes. Consumers are showing a solid trend to spend as we head into Christmas.

The RBA’s own measures of lending in the economy reveal that business continues to borrow at exceptional levels. Business credit is now growing at an annual rate of more than 23 per cent after accelerating over the last quarter to 2 per cent growth a month or more – a further indication that there is little prospect in sight of investment and economic expansion winding down into 2008.

Personal and housing credit, however, show a different story. Personal credit growth has tailed off over recent months, going negative in the last quarter. It appears consumers are spending more while borrowing less, something the RBA won’t be unhappy about as long as the credit decline doesn’t steepen. Housing credit remains flat, growing at less than 1 per cent per month recently, quite modest by previous years’ standards.

A reversal in the borrowing profile across the economy is now complete – consumer borrowing for housing and consumption was driving the economy for the first half of the decade with businesses reluctant to invest. Now it’s business-owners driving the economy with long-overdue investment in capacity that will make for an economy more able to grow sustainably.

That’s good for the medium to long term, but doesn’t do much for the inflation threat which faces us in the short to medium term. And that’s what is highly likely to see the RBA decide to raise rates on Melbourne Cup day, adding another $17 a month to variable home loan repayments for every $100,000 borrowed.