Local rate rise still a chance despite global jitters

Despite another rise in the jobless rate in Australia, a further cut in interest rates in the US and central banks’ liquidity transfusion to world credit markets this week, the likelihood of a further interest rate rise in the New Year hangs over Australian borrowers.

Unemployment has risen again in November, now at 4.5 per cent. But this is wholly to do with the rising participation rate, now at a record 65 per cent, as people enter the workforce to take advantage of a great jobs market. There was a modest increase in full time jobs and a big jump in part time jobs last month and the overall picture this year has not changed – strong growth in jobs – and there is no sign of a let-up.

This is all good news, but comes at a price. It underlines the strong rate of expansion in the economy currently which is behind the rise in inflationary pressures that risk further increases in interest rates in 2008. There remains a reasonable chance that official interest rates will rise at the next meeting of the RBA board, which is not until early February.

The wildcard at play is the risk of economic downturn internationally, stemming from the subprime-lending-inspired credit shakeout in world financial markets. Lower interest rates overseas and measures to boost liquidity in global credit markets probably won’t have much impact on Australia in the short term. Central banks in the US, Canada and Europe have injected close to $100 billion into wholesale markets to help get banks lending to each other again.

But the Reserve Bank is still worried more about the risks of an overheating domestic economy over the risks from a downturn in the US and world economies. This balance of risks was underlined by the new federal Treasurer Wayne Swan in a speech today who said Australia faced a period of inflationary pressure over the next year or so that will take some time and effort to unwind.

In October, the number of housing loan commitments by owner occupiers fell slightly, 0.7 per cent. This was on the back of a fall in purchases of existing dwellings and masked a 2.6 per cent rise in loans for new construction.

Home lending remains flat with rises in interest rates this year keeping a lid on the housing market. This is despite significant underlying demand for new and existing homes given the buoyant job market and solid wages growth. The latest figures pre-date the November rate rise and with the shadow of further rises in interest rates hanging over the market housing is likely to show only modest growth in early 2008.