RBA rates caution vindicated

If the economic signals continue in the same vein of recent weeks, we may well soon be talking about interest rate rises again sooner or later. All the indications since the Reserve Bank left interest rates steady last week seem to support the Bank’s view that any scope for further interest rate cuts is waning fast.

Conditions in the US continue to point upwards, although recovery appears slow at best, and the international threat posed to Australia earlier in the year is subsiding for now. This allows the RBA to focus more fully on domestic factors, some of which have the RBA board clearly worried. To that end, it delivered a strongly worded warning on household debt and soaring house prices in its quarterly monetary statement last Monday.

Australian households are going into debt faster than any other developed country and putting the economy at risk, the Bank warned. “A good deal of distress to the economy” may well result when the housing cycle turns, the statement said. Growth in credit is “clearly faster than is sustainable” with household borrowing at 19.6 per cent in 2002-03, compared with 10 per cent or less in the US, UK and Canada.

Bureau of Statistics figures showed lending to residential property investors rose 8.4 per cent in June, up more than 37 per cent in a year. Borrowing by owner-occupiers also rose by 6.7 per cent for the month and 21 per cent for the year. The latest average weekly earnings figures were also surprisingly high at 2.5 per cent in the June quarter. There is doubt over this measure of wage growth and the alternative Wage Cost Index figures have been lower. But fewer signals send the inflation alarm bells ringing than hefty wage-rate rises and the trends will be closely watched in coming months. For now, however, rates will stay on hold as the RBA waits and watches.