RBA faces tough rates decision

The strong chance of a February rise in official interest rates for Australian borrowers has lessened somewhat in the new year amid the growing threat of recession in the US and the fact that rates are already edging up for home borrowers here anyway. But an Australian economy going from strength to strength, however, means the chances of a rate hike next month haven’t gone away – the Reserve Bank (RBA) will take no prisoners in the fight against inflation.

The RBA has a real challenge on its hands in early 2008, having to weigh the robust Australian economic conditions against the strengthening signs of significant slowdown in the US, which would in turn trigger a worldwide slowing including Australia. At the same time, interest rates are already on the rise here without any action by the RBA as lenders edge up their rates in response to the rising cost of credit from the US sub-prime fallout.

Other lenders can be expected to follow NAB, ANZ and CBA and push up variable home loan rates in the coming months. But the magnitude of these rises is likely to be similar to what we’ve seen already – around 0.1 and up to 0.2 in some cases. This will be spread over some months as smaller non-bank lenders move in response to their own wholesale funders’ moves.

This fragmented and marginal lift in rates may not be enough for the RBA which would want to lift rates in increments of 0.25 percentage points, perhaps sooner rather than later. The latest economic data underline how strong the economy remains. Retail trade in November rose 0.8 per cent seasonally adjusted, a strong result going into Christmas and showing that consumers were not to phased by the last rate rise. The quarterly official job vacancy figures suggest no let up yet in the extraordinary rate of job creation. Even building approvals showed a strong result in November despite the rate rise, jumping 9 per cent, led by a surge in the apartment segment.

The question for the RBA though is what the Australian economy is going to look like in six to nine months time. Will a rate hike now seem like one rise too far later, or will any international downturn be muted (especially if China continues to boom) allowing the Australian economy to keep on humming?

Infochoice.com.au