Rates on hold in May despite inflation

Despite last week’s revelations that inflation is at its highest levels in well over a decade, the Reserve Bank is unlikely to raise interest rates again at its monthly board meeting on Tuesday. The past week has seen further evidence that a slowdown in the Australian economy is underway in 2008 and gathering momentum. Key data on retail sales, building approvals and credit levels for March released this week are all pointing downward and suggesting the heat is coming out of demand.

Retail sales recovered somewhat in March, growing 0.5 per cent after no growth at all in the preceding two months. But the latest modest growth mainly reflects higher prices paid for food and the underlying trend still sees consumer spending weakening.

The RBA’s own credit figures show total consumer and business borrowing growing less than 1 per cent again in March and the annual rate of growth now falling after peaking last December. Within the overall figure, borrowing for owner-occupied housing remains flat, for investment property growth has stalled, and personal loan and credit card borrowing actually fell. Even business borrowing which was going gangbusters last year has settled back to much more modest growth rates.

Building approvals figures tally with those for housing credit, falling 5.7 per cent in March alone and fuelling a downward trend that set in after the November rate rise.

It seems a classic response to high interest rates is occurring – people are curbing their spending and borrowing across the economy in a reversal of their actions in 2007. This suggests RBA governor Glenn Stevens may be right in his hints that he feels the Bank has "done enough" on interest rates to rein in an effervescent economy. But for beleaguered borrowers, while the news that official interest rates may have peaked will be welcome, the worst may not be over.

First, the high levels of inflation currently in the system mean it is unlikely we’ll see interest rates coming down any time soon. Second, even if official rates stay steady there is no guarantee we won’t see lenders edging up their home loan rates as they cope with the global credit crunch which has raised their costs of wholesale borrowing.

Infochoice.com.au