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FURTHER official interest rate rises could choke off consumer spending and grind the economy to a halt, economists warn.

Herston Economics chief economist Clifford Bennett says if the Reserve Bank raises the cash rate to five per cent by year’s end, the economy would “grind to a standstill”.

The current cash rate is 4.25 per cent, after the RBA lifted the rate by a quarter of a percentage point on Tuesday in an effort to further rein in expansionary pressures.

It was the fifth monthly interest rate rise by the central bank since October last year.

“If the cash rate gets to 5 per cent … the domestic economy will grind to a standstill,” Mr Bennett said.

“We’re seeing in the Sydney press examples of them having to choose between buying groceries and paying their electricity bill and the added burden from the RBA is completely unwarranted, unnecessary and unwanted.”

RBA governor Glenn Stevens said it was appropriate to raise the cash rate towards its long-run average given that “the risk of serious economic contraction

Most economists say the average long-run cash rate is around 5 per cent.

Nomura Australia economist Stephen Roberts said rising interest rates meant consumers were paying a greater proportion of their income in servicing debt.

Data compiled by the central bank showed that when the cash rate was 3.75 per cent at the and of the December quarter of 2009, the average household was paying more than 10 per cent of its income, minus taxes and some other regular payments, on interest payments.

When the cash rate topped 18 per cent in December 1989, the average household was spending just under nine per cent of its income on interest payments.

The figures also show that in December quarter of 1989, household debt was slightly less than half household yearly income.

Twenty years later it was equal to one and a half times an average household’s yearly income.

“That data is from fourth quarter (2009) and you have to remember we’ve had two more interest rate rises already,” Mr Roberts said.

He said a lower interest rate of 3.75 per cent to 4 per cent would be more appropriate given the current difference between the cash rate and the interest rates of major lenders.

Official economic data now points to a slowing economy, with building approvals, employment and retail sales data for March all coming in under market expectations.

Mr Bennett said the data suggested Australia’s economic performance post the global financial crisis was weaker than first thought.

“When you look at the domestic economy, there are patchy elements,” he said.

“There are storm clouds on the horizon.”

Source  :  www.news.com.au

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Business has warned that West Australians could be priced out of the resources boom and interest rates pushed even higher if the Federal Opposition follows through with a promise to slash the number of immigrants.

WA Chamber of Commerce and Industry chief economist John Nicolaou said the flagged cut would mean the abandonment of major developments by companies unable to find the workers they need to exploit the State’s natural resources.

He was backed by Trade Minister Simon Crean who said cutting immigration now would devastate economies like that of WA and Queensland which were crying out for workers.

The Opposition has signalled cutting the net immigration intake which, when temporary workers and students are taken into account, edged down to 297,000 in the three months to the end of September.

Shadow immigration minister Scott Morrison said forecasts of Australia’s population reaching 36 million by 2050 proved immigration under the Rudd Government was “out of control”.

He said a coalition government would bring immigration levels back to a “sustainable level”.

But Mr Nicolaou said with WA needing 400,000 people over the coming decade to deal with the resources boom, cutting immigration levels could prove economically disastrous to the State.

He said major resource companies would go overseas if they could not get the labour they needed in Australia.

Those that did continue work in WA would have to pay higher wages for their staff, which would then push up costs for the rest of the community.

“I think it’s very short-sighted if they’re looking at cutting immigration, because it’s going to push up costs for everyone through wages going up,” he said.

“We lost investment in the last boom because there were insufficient workers, and we run the risk of doing that again.”

Professor Peter Mc Donald of the Australian Demographic and Social Research Institute also warned that trying to cap immigration levels would have major economic ramifications for people already living in Australia. The Reserve Bank was already lifting interest rates to dampen demand.

“You’re just going to push up wages pressures and that will feed into higher interest rates,” he said.

Mr Crean said the resource States would be disadvantaged if the number of workers was artificially restricted.

“Mining companies generally are saying one of the biggest challenges they face … is the availability of skilled labour,” he said. “People calling for cuts to immigration programs ought to understand how the economy is functioning.” 

Source  :  www.thewest.com.au

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There’s more pain on the way for Australia’s borrowers with the Reserve Bank today raising interest rates for the third time in as many months.

As widely tipped, the central bank lifted its key cash rate by 25 basis points to 3.75 per cent following its monthly board meeting. It’s the first time the RBA has lifted rates three months in a row. (Click here for economists’ reaction, including Michael Pascoe and Peter Martin.)

”In Australia, the downturn was relatively mild, and measures of confidence and business conditions suggest that the economy is in a gradual recovery,” RBA Governor Glenn Stevens said in a statement accompanying the rates verdict. The central bank’s ”gradual” increases in rates will ”work to increase the sustainability of growth in economic activity,” he said.

For a typical mortgage holder on a $300,000 mortgage, today’s rate rise will add about $47 to monthly repayments, assuming commercial banks match the RBA’s move. Officials for most of the major banks this afternoon said their rates policies were under review.

The Reserve Bank has made regular public comments in recent weeks that it sees no need to keep interest rates at ”emergency” levels as the economy rebounds from a slowdown during the past year. Ric Battelino, the RBA’s deputy governor, last week said the economy’s growth is likely to extend ”for a few more years yet.”

More to rises come

Still, the economic data continue to provide mixed readings. A measure of manufacturing activity in November out today showed the sector continues to grow with companies adding jobs, although the stronger Australian dollar slowed the pace of expansion.

Overall building approvals, meanwhile, surprisingly fell 0.6 per cent in October, according to other figures out today. A 5 per cent gain in approvals for private homes was countered by a 19 per cent drop in permits for flats and townhouses.

Even with today’s rate increase, the Reserve Bank’s efforts to tighten monetary policy are likely to be far from over.

”The big change in this statement was their reference to the increases so far as being material,” ANZ’s head of Australian economics Warren Hogan told Reuters.

”I read that as implying that they’re ready to now sit back and watch how these increases affect the economy. And the hurdle for further rate hikes will be much higher than we have seen so far.

“So I think our view that they’re going to 4 (per cent), 4.25 then sit there for much of the year is the right one. There’s every chance they’ll do it in February and March, although I wouldn’t be surprised if it’s dragged out over a number of months.”

JP Morgan’s Chief Economist Stephen Walters agreed that the RBA may make it four rate rises in a row: “With inflation likely to creep up, and the worst in the economy having passed, there is no need to keep rates at very expansionary levels.”

“We think they will again lift rates in February,” Mr Walters

said. ”The RBA does not meet in January, but I think they will hike when they return after the break. The word ‘gradual’ is still there in the RBA statement and I think they will start going slow in lifting after February.”

Before today’s move, investors were betting that rates would rise to at least 4.75 per cent in a year’s time – equivalent to four more rate rises over the period. Three weeks ago, however, the betting was for rates to rise to 5.25 per cent, indicating confidence in the economy’s strength has recently diminished.

The RBA’s board is not scheduled to meet again until next February.

Political view

Treasurer Wayne Swan said the rate rise would pinch household funds.

”This is tough for families…when rates go up it has an impact on the family budget,” Mr Swan told reporters.

He took aim at old comments from new Opposition Leader Tony Abbott that the government’s billion-dollar stimulus had led to interest rates rises.

”That is laughable and it comes from a political leader who is prone to making erratic statements,” Mr Swan said.

”Mr Abbott is in denial of the fact that this country has performed well in the global recession.”

Even with the latest jump, these rates were last seen in 1967, Mr Swan said.

Mild downturn

A year ago, the Reserve Bank was in the midst of a series of deep interest rate cuts as Australia joined other countries in attempting to limit the damage from the global financial crisis.

Last December, the RBA sliced one full percentage point from its cash rate, lowering it to 4.25 per cent on the way to a fifty year-low of 3 per cent by April. After a pause, the central bank has started to lift rates back towards more normal levels as fears of an economic crunch abate.

”The effects of the early stages of the fiscal stimulus on consumer demand are fading, but public infrastructure spending is starting to provide more impetus to demand,” Mr Stevens said in his statement today.

The jobless rate has been one of the surprises, with Australia’s unemployment holding well below 6 per cent when many had predicted a level in excess of 8 per cent. Business investment has also held up well in large measure due to the sharp rebound in China and India – leaving Australia as one of the few countries to start raising rates.

”Prospects for ongoing expansion of private demand, including business investment, have been strengthening. There have been some early signs of an improvement in labour market conditions,” Mr Steven said. ”The rate of unemployment is now likely to peak at a considerably lower level than earlier expected.”

The RBA believes economic growth ”is likely to be close to trend (in 2010) and inflation close to target.

Market response

In the aftermath of the rates news, the Aussie dollar initially dropped before recovering to about 91.5 US cents in recent trading, close to its level before the RBA statement.

Shares, also turned mildly lower before recovering to be about 0.2 per cent higher for the day with less than an hour of trading left.

Source :   www.theage.com.au

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Parents of children at private WA schools should brace for fee rises up to four times the inflation rate next year, with new figures showing education costs leapt 37.5 per cent in the past five years.

Elite colleges said it was too early to set next year’s fees but they predicted rises between 5 and 8 per cent.

Principals said big pay rises to State schoolteachers last year in a three-year agreement were driving up fees at private schools because they competed for staff.

Scotch College principal Andrew Syme said fees at private schools had to go up at least 6 per cent to keep pace with teachers’ pay rises before any improvements in service.

Anglican Schools Commission chief executive Peter Laurence said fee rises at low-fee church schools would be similar to last year’s increases of between 6 and 9 per cent.

“Teachers’ pay is the number one driver that’s going to keep increases higher than they used to be a few years ago,” he said.

Australian Bureau of Statistics figures show education costs in Perth, comprising school fees and other miscellaneous costs, have jumped 37.5 per cent since 2004 – the biggest increase registered by any capital city. Canberra had the second biggest leap, with 29.4 per cent.

The rise was driven by a 55.9 per cent lift in fees associated with pre-schools and primary schools. By contrast, pre-school and primary school education costs in Sydney rose almost 23 per cent.

Pre-school and primary school fees have grown faster than the average wage of West Australians which, between 2004 and today, jumped 44 per cent – the biggest rise of any capital city.

The State Government has held down public primary school fees so the increase is mainly for private schools.

A private education in WA costs between $3000 a year for Year 12 tuition at low-fee Catholic schools and $17,000 a year at high-fee independent schools. Many private schools in Sydney and Melbourne charge more than $20,000 a year.

Association of Independent Schools of WA executive director Valerie Gould said the recent teacher pay rises and rising construction costs in the building boom two years ago may have been the big contributors to increased education costs.

WA Chamber of Commerce and Industry chief economist John Nicolaou said the fact fees were going up so much in the private sector reflected poorly on the public school sector.

He said people were voting with their feet and going to the private sector even while fees were rising, which said something about what parents thought of Government schools.

WA Secondary School Executives Association president Rob Nairn said students in Years 8 to 10 could get an education at a State school for a voluntary contribution of $235 a year. Costs were higher in Years 11 and 12 but much less than in private schools.

Source  :   www.thewest.com.au

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wa small firmsSigns are emerging that the worst of the global financial crisis is over, according to a new survey, and the State’s small businesses are leading the way.
  
The Commonwealth Bank-Chamber of Commerce and Industry quarterly survey of business expectations, released yesterday, shows that economic conditions in WA appear to be stabilising after six months of decline.
  
CCI chief economist John Nicolaou said that the community could “take heart” from the results and that an economic recovery within the next 12 months was on the horizon.
  
“This survey is an important lead indicator of future economic activity,” he said.
  
“While just over half of all businesses remain pessimistic about the next 12 months, that’s come back from around 75 per cent of businesses that were pessimistic last quarter, and at the same time businesses that think conditions will improve (over the same time) has doubled.”
  
Mr Nicolaou said small businesses in service industries were the most optimistic, with 17 per cent of the firms surveyed believing conditions would improve over the next 12 months.
  
Beaumonde Catering owner Mark Dimmitt said he felt small business was better prepared for the slowdown than in other downturns because it had taken time to flow to Australia from the US.
  
He said that though his trade had been affected and was patchy, February was a record month for his 20-year-old business and he expected an upturn over the next year.
  
Woolworths regional manager Brad Bolin criticised “illogical barriers to doing business”, referring to trading hours in WA.
  
Mr Bolin said “conservative estimates” showed the group would need to employ another 300 staff in WA if trading hours were extended to 9pm.
  
“During this time of economic uncertainty there are still companies (looking) to hire more people — these efforts shouldn’t be undone by illogical barriers to doing business,” he said.
  
Coles and Kmart have said they expected to employ another 350 workers if 9pm trading was approved.

Source www.thewest.com.au

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