RBA governor signals rates may have peaked

Hopes are rising that interest rates have peaked after Reserve Bank governor Glenn Stevens’ testimony to Parliament today, along with spending and credit data pointing to an economy starting to slow. Stevens said that the "strong response" (ie. hiking interest rates four times in eight months) to clamp down on spending growth in the Australian economy appears to be working and "a change in trend is occurring".

The tone of his address suggests the RBA is now focussed on the question of whether we have passed a turning point rather than trying to reach it. The economy now appears to be slowing and so the questions are how much and how quickly. The answers are "quite uncertain", Stevens says, but his comments suggest there is a good chance that rates will now stay on hold for some months to come to lock in their anti-inflationary impact.

"I can’t tell you at what point rates will start to come down. I can’t even promise that they won’t rise again, [but] I think for the moment they are the right number," Stevens said.

Rates were left on hold for April by the Reserve Bank as expected and borrowers now face a nervous wait for the May meeting. We may well manage to avoid a further 0.25 percentage point rise next month and if so it will probably confirm that rates have peaked.

A lot still depends on the result of the first quarter inflation figures out late in April and any further signs in the meantime that the economy is slowing. But Stevens says we already knows the headline rate is going to be high, around 4 per cent, but that reflects last year’s conditions and the challenge is to gauge underlying inflationary pressures from here on and how they might be ease.

Retail trade figures for February only support the view that the desired slowdown has begun. For the second month in a row, consumer spending fell around the country. The trend is now firmly downward to more moderate levels consistent with the heat coming out of the economy.

The RBA’s own figures for private credit growth in February also give some encouraging news on this front. Just 0.7 per cent growth in housing, personal and business borrowing for the month. A big drop off in the rate of growth of business borrowing was the main factor, but perhaps more importantly for the RBA, personal credit has also shrunk in the first two months of this year. Housing remains flat.

Infochoice.com.au