Peak in interest rates may be near

We may be coming to the end of the cycle of rising interest rates but it’s likely that we’re not quite there yet. With the second rise in two months coming as expected in March, official rates are now at 7.25 per cent and variable home loan rates at around 9 per cent.

In his statement following this week’s rate rise, RBA governor Glenn Stevens says that while higher interest rates are seeing household spending and borrowing starting to slow, no one can be sure yet by how much. And a solid slowdown from current levels is going to be needed to bring inflation back into its target band below 3 per cent. This suggests the RBA is now pondering where to draw the line and end the upward cycle of interest rates. But it is not confident that it has reached that point yet.

We are probably safe from a rate rise in April as the bank looks to gauge the impact of its rate action so far. But whether we get another hike in May will depend very much on how bad the inflation figure for this first quarter of 2008 is. If underlying inflation is any more than the 3.5 per cent it was at the end of 2007, then we would be facing another quarter-point rate rise in May.

But the RBA will also be watching the state of the US and global economies. With high rates battering businesses and consumers at home and the chance of a worldwide economic downturn, the risk is we end up with a repeat of the late 80s-early 90s boom-bust scenario, albeit on a smaller scale.

Economic growth slowed in the last quarter of 2007, GDP rising 0.6 per cent for an annual rate of 5.7 per cent, down from over 6 per cent in the previous quarter. Growth may be expected to slow further this quarter in the wake of further rate rises but there are also a lot of pointers to economic growth staying well supported; high population growth, booming business investment and ongoing job creation.

Retail spending has eased off in the last couple of months and did not grow at all in January in seasonally adjusted terms. Building approvals grew modestly but the trend over recent months is still down after rising interest rates brought an end to a recovery last year.

Infochoice.com.au