Save to curb inflation, RBA says

Australians need to save more for the economy to avoid a more rapid run-up in inflation, triggered by nation’s rising terms of trade, the Reserve Bank said today.

“In putting together the Reserve Bank’s forecasts it has been assumed that more of this boost to income is saved than was the case in the earlier boom in the terms of trade,” RBA assistant governor Phillip Lowe.

“This reflects two factors. The first is the different position of the federal budget and the second is the more cautious approach to spending currently being displayed by the household sector.”

The federal budget, handed down this week, contained no major increases in public spending and is expected the return to a surplus by 2012-13.

In that time, the RBA forecasts Chinese steel production will continue to drive demand for Australian iron ore and coal strong, boosting the nation’s terms of trade.

Terms of trade are the prices of a nation’s exports relative to its imports.

“If this lift in saving does not occur, then demand in the economy could well be stronger than forecast, and this would put additional pressure on capacity,” he said.

A lack of spare capacity in the economy has pushed the year-to-March inflation figure to 2.9 per cent from 2.5 per cent in the year to December, which surprised the RBA, Mr Lowe said.

“Disinflationary forces in the economy are not quite as strong as previously expected, largely because the economy has performed better than previously expected,” Mr Lowe said, in the speech delivered to Colonial First State Investment Forum in Sydney.

The RBA expects inflation to fall only to 2.75 per cent later this year, less than originally anticipated after the release of the March data.

Retail sales have remained lacklustre since the middle of last year, after the end of the government’s cash stimulus grants to households during the financial crisis. Six interest rate rises since October have also cut into demand at retailers, with a number of businesses including Fantastic Furniture, Clive Peeters and Woolworth’s flagging weaker sales ahead.

The RBA lifted interest rates to 4.5 per cent his month, creating more headwinds for shoppers. The latest rate rise added another $46 to the average monthly repayment cost on a $300,000, 25-year mortgage.

Investors currently foresee no chance of an interest rate rise in June, but predict the official cash rate will be at 5 per cent within a year, according to Credit Suisse data.

The central bank predicts 3.25 per cent economic growth this year accelerating to 3.75-4 per cent growth in the next couple of years, amid rising prices for commodities exports.

Source  :  www.watoday.com.au

Advertisement

Read Full Post »

Rates now closer to normal, RBA boss says

Reserve Bank governor Glenn Stevens has signalled interest rates are on their way back up with mortgage rates likely to edge up between half and a full percentage point.

Giving evidence to the House of Representatives economics committee in Canberra, Mr Stevens said the RBA’s focus continued to be on what mortgage rates were offered by commercial banks rather than on the Reserve’s official cash rate.

He said given the commercial banks had lifted rates over and above what the RBA had done, there was still about a half and a full percentage point to go before mortgage rates were back to what the Reserve would consider close to their long term average.

“There’s a little distance to go yet before I think you could characterise the setting of interest rates as normal or average,” he said.

The RBA surprised markets by leaving official rates on hold at its February meeting.

Mr Stevens said on top of the Reserve’s own lift in official rates, the commercial banks actions had effectively delivered three and a half interest rate rises to mortgages cases, and in the case of Westpac customers, four rate hikes.

He said one of the advantages of lifting rates as the RBA did in the last three months of 2009 was that it could hold rates in February and get a clearer picture of how the economy was travelling.

“You get that luxury when you can wait a little a bit further down the line,” he said.

Mr Stevens said Australia had performed much better than even the RBA had expected out of the global recession.

But he warned that meant the economy was now heading into an upswing stronger than otherwise would have been the case.

“With the economy having had only a mild downturn with begin the upswing with less spare capacity than would typically be the case after a recession,” he said.

“There’s less scope for robust demand growth without inflation starting to rise again down the track.

“Monetary policy must be careful not to overstay a very expansionary setting.”

Mr Stevens said the resources sector in particular was looking to grow quickly, with the terms of trade likely to head back to the record highs seen in 2008 this year.

He also highlighted the strength of Australia’s sovereign debt position, hosing down fears the country was carrying too much debt.

“Australia’s position is by any measure very strong indeed,” he said.

The governor also played down fears raised by Opposition finance spokesman Barnaby Joyce that Australia could default on its debts.

Mr Stevens said Australia had never defaulted before and there were no signs it would now.

“I very much doubt there ever will be,” he said. 

“Monetary policy must be careful not to overstay a very expansionary setting.”

Mr Stevens said the resources sector in particular was looking to grow quickly, with the terms of trade likely to head back to the record highs seen in 2008 this year.

He also highlighted the strength of Australia’s sovereign debt position, hosing down fears the country was carrying too much debt.

“Australia’s position is by any measure very strong indeed,” he said.

The governor also played down fears raised by Opposition finance spokesman Barnaby Joyce that Australia could default on its debts.

Mr Stevens said Australia had never defaulted before and there were no signs it would now.

“I very much doubt there ever will be,” he said.

Source www.thewest.com.au

Read Full Post »

Market odds move firmly against Reserve Bank interest rate rise

THE market odds have moved firmly against an interest rate rise by the Reserve Bank in February.

The sharp change in direction, which began on Tuesday after the central bank revealed its December 1 meeting minutes, accelerated yesterday following a speech by RBA deputy governor Ric Battellino.

Mr Battellino signalled that rates could stay on hold when the RBA next meets in February, saying the “overall stance” of monetary policy was “back in the normal range”.

His comments, at the Australian Finance & Banking Conference in Sydney, surprised the markets, triggering a slump in the Australian dollar to below US90.

Last night the dollar was hovering around US89.70.

Financial market betting on a 25-basis point rate hike in February retreated from a 67 per cent chance to 45 per cent.

Mr Battellino said that although the cash rate still seemed “unusually low” at 3.75 per cent, monetary policy was back “in the normal range” because the current level of deposit, housing and business lending rates made the cash rate equivalent to a “before the crisis” level of 4.75 per cent.

“Taking these considerations into account, it would be reasonable to conclude that the overall stance of monetary policy is now back in the normal range, though in the expansionary segment of that range,” he said.

The deputy governor’s remarks were made half an hour after the Australian Bureau of Statistics revealed economic growth in the September quarter was weaker than expected.

The national accounts showed GDP edged up just 0.2 per cent in the three months to September, half the pace of growth expected by the market, for an annual rate of 0.5 per cent.

The main drag on growth was a slump in exports which coincided with a jump in imports.

However, demand from households, businesses buying more equipment and government investment was solid.

ANZ acting chief economist Warren Hogan said the GDP figures indicated there was little urgency to get official interest rates back to a neutral setting, adding that Mr Battellino’s comments had “dealt a solid blow” to the prospect of substantial gains in the cash rate over coming months.

“Put another way, the emergency setting for interest rates has now been removed and policy will be adjusted as and when required by economic conditions,” he said.

Westpac chief executive Gail Kelly told reporters after the bank’s annual meeting in Melbourne yesterday that the RBA was likely to raise rates “very carefully” in 2010.

However, she said the official cash rate was not quite yet at a “normal” level.

Mrs Kelly said she remained cautious about the economic outlook while the bank’s chairman Ted Evans said a “V-shaped” recovery for Australia was unlikely.

“It will be a long recovery and that’s what our plans are based on,” he said. 

Source  :  www.news.com.au

Read Full Post »

RBA lifts rates again

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

Read Full Post »

Banks set own interest rate hikes

 

Banks say they will be forced to lift rates

Will be more than official RBA rises

Facing higher costs of raising money

 

 

BANKS have confirmed homeowners’ worst fears: they will increase mortgage rates by more than the official Reserve Bank rises in the coming months.

The Big Four banks claim they will be forced to lift interest rates beyond the official RBA cash rate increases because they are facing higher costs of raising money in the wholesale markets.

Full story  :  http://www.news.com.au/business/money/story/0,28323,26194165-5013952,00.html

Read Full Post »

Interest rates on hold

The Reserve Bank of Australia (RBA) left interest rates on hold at 3 percent as predicted.                                                

A  survey by AAP had expected the RBA to leave the cash rate at the lowest since 1960.

Treasurer Wayne Swan said last weekend that it was obvious that rates will rise, while Minister for Financial Services, Chris Bowen, warned yesterday that rates can’t stay low forever.

Some economists believe the first rate rise could come this year, but the general view is that rates will remain on hold until the middle of next year.

In a statement released after the announcement, governor Glenn Stevens said the risk of “severe contraction” in the Australian economy had abated.

“Economic conditions in Australia have been stronger than expected a few months ago, with both consumer spending and exports notable for their resilience,” the statement says.

“Measures of confidence have recovered a good deal of ground.”

The statement adds: “The board’s judgment is that the present accommodative setting of monetary policy is appropriate given the economy’s circumstances.

“The board will continue to monitor how economic and financial conditions unfold and how they impinge on prospects for sustainable growth in economic activity and achieving the inflation target.”

 

Read Full Post »

The Reserve Bank of Australia expected to leave rates on hold

The Reserve Bank of Australia (RBA)  is due to announce its decision on interest rates at 2.30pm (AEST) on Tuesday.

The economists surveyed by AAP said the cash rate will remain at a 49 year low of three per cent after the central bank’s board meeting on August 4.

“The RBA appears to have no intention of reducing the cash rate any further,” said Matt Robinson, an economist with Moody’s Economy.com.

“I think a housing market bubble is starting to form, and given the sentiment that governor Stevens expressed in his speech to the Australian Business Economists, that is something that the RBA is watching and that would be a reason for them to maybe hike interest rates earlier.”

There were doubts about whether the RBA would be deterred from raising rates if unemployment continued to rise.

The RBA has kept the cash rate at 3 per cent for three consecutive months.

Michael Turner, an economist with financial markets research group 4Cast, said the prospect of rising unemployment would mean the cental bank could keep rates steady until well into 2010.

“We’re still of the opinion the worse is yet to come and things look better now than they did a couple of months ago, which is why we’re now calling it on hold (in August) rather than going lower,” he said.

“But we still think there’s enough of a story in the lack of utilisation in the economy at the moment that price pressure might be moderate enough at 3 per cent.

“We’re currently chewing on a rate rise in 2010 at the moment. It’s possible, but not until late 2010.”

If you look at the split in the market or the way the debate was being conducted it was very much the idea that the RBA isn’t going to hike because they never have while the jobless rate has been rising.

Read Full Post »

Swan slams ‘selfish’ CBA rate decision

Treasurer Wayne Swan has taken aim at Australia’s biggest home lender, labelling it selfish for lifting its mortgage and business lending rates. 

Other banks have refused to rule out following the Commonwealth Bank of Australia’s (CBA’s) surprise decision to lift its home and business loan rates by 10 basis points to offset higher funding costs.

The opposition said the government’s huge debt burden was putting pressure on interest rates, while a prominent market economist said it may force the Reserve Bank of Australia (RBA) to cut the official rate again to counter any impact from CBA’s move.

CBA said it took Friday’s decision “reluctantly”, but at a standard variable mortgage rate of 5.74 per cent, up from 5.64 per cent, it was still the lowest on the market.

The rate hike will add $18 a month to repayments on a $300,000 home loan over 25 years.

The bank said it had absorbed as much of its additional funding costs for as long as it could.

“Unfortunately, we have seen the bank’s wholesale funding costs remain high and continue to increase as previous long term funding matures and is replaced with new funding at significantly higher cost,” CBA group executive of retail banking services Ross McEwan said in a statement.

Such reasoning drew no sympathy from the treasurer.

There are ups and downs when it comes to those decisions over time, but there are few decisions I can think of that are more selfish than this one,” Mr Swan told reporters in Brisbane.

“I think Australians, rightly, will be furious with the Commonwealth Bank.”

Prime Minister Kevin Rudd echoed those sentiments during a speech to a business lunch in Brisbane.

“We are all in this together – businesses, workers, government and the Reserve Bank – and today’s decision by the Commonwealth Bank runs counter to this nationwide effort,” Mr Rudd said.

The other three major banks – ANZ, National Australia Bank and Westpac – said their rates were constantly under review.

NAB said it had no current plans to raise its home loan rate but noted “all Australian banks” had been incurring significantly higher funding costs for some time.

Opposition treasury spokesman Joe Hockey said the government was putting pressure on interest rates by running up a huge debt.

“Kevin Rudd and Wayne Swan feigned outrage about this interest rate increase, yet they are directly responsible for it,” Mr Hockey told reporters in Sydney.

“This is the beginning. You will end up with higher interest rates directly as a result of the spending binge of the Rudd government and the massive debt they are accruing.”

Home buyers may be enjoying the lowest mortgage rates in 41 years, but have already missed out on about 30 to 40 basis points of the RBA’s total 425 basis points of official rate cuts, with banks refusing to pass on the cuts in full because of the cost of funding.

For small businesses it has been even worse, being short changed by about 140 basis points.

The CBA’s decision comes in a week that saw massive boosts to both consumer and business confidence, as well as data showing sustained growth in home lending – sucked in by low mortgage rates and a more generous first home owners grant.

April mortgage data showed loan demand has grown for seven straight months to a 14-month high, as well as record demand from first home buyers and the strongest interest from investors in nearly two years.

It also showed that the banks have cornered more than 92 per cent of all loans – a 33-year high.

Westpac chief economist Bill Evans said CBA’s decision could well be countered by another cut by the RBA.

“If it does have an impact, particularly on confidence in the housing market, which has been the most encouraging source of recovery in the Australian economy, it may bring a rate cut back on the table at the Reserve Bank,” Mr Evans told Sky News

Source  :  www.thedaily.com.au

Read Full Post »

Stimulus, rates ‘spur first home buyers’

First home buyers now comprise a record proportion of the residential housing market after responding to low interest rates and the government’s revamped assistance package, economists say.

First home buyers made up 27.5 per cent of all home loans in March, a record since the Australian Bureau of Statistics (ABS) began the data series in 1991, and compared with 26.5 per cent of the total market in February.

The ABS data also showed that the housing market has recovered to its February 2008 levels, when interest rates were still being raised by the Reserve Bank of Australia (RBA) before a series of monthly cuts since September to a 49-year low last month.

The number of home loans for owner-occupied housing jumped to a 13-month high of 59,793 in March.

The 4.9 per cent rise in March was even sunnier than economists’ forecasts of a 4.5 per cent increase.

“The housing industry is one of the more interest rate sensitive sectors and its a positive that the response has so far been rapid,” ICAP senior economist Adam Carr said.

“The result clearly ads weight to the argument that the Reserve Bank of Australia has done enough.

“It’s lost on many that other central banks around the world are cutting aggressively to counteract a breakdown in the transmission mechanism. This isn’t the case here.”

Between September and March, the central bank cut official interest rates by 400 basis points to 3.25 per cent in a bid to stimulate a flagging economy.

In early April, the RBA cut the cash rate by a further 25 basis points to a 49-year low of three per cent.

The ABS data found that total housing finance by value rose by 6.7 per cent in March, seasonally adjusted, to $20.688 billion, while loans to investors rose by 4.7 per cent from a year earlier.

“It’s particularly positive that investors are coming back into the market from low levels,” Mr Carr said.

Housing construction rose 13.9 per cent, or 5,565, year on year.

Lending for new dwellings climbed 2,610, or 8.8 per cent, while lending to buy established homes climbed 51,619, or 3.8 per cent, since March last year.

JP Morgan economist Helen Kevans said the boost to the federal government’s first home buyers grant has lifted demand for housing, particularly for new homes.

“As expected, demand for home loans again was underpinned by first home buyers, owing to the attractive grant and improved housing affordability, stemming from lower interest rates and falling house prices,” Ms Kevans said.

“The bigger grant for new building largely explains the solid 8.8 per cent rise in loans issued for the purchase of new dwellings in March.

“In coming months, we believe grants will continue to underpin demand for home loans, particularly during the June quarter given expectations that the expanded grant will end on June 30, as originally planned,” she said.

The government’s first $10.4 billion stimulus package, unveiled in October, doubled the first home buyer grant for established homes to $14,000, and tripled it to $21,000 for newly-constructed dwellings.

There is speculation the grant for brand new housing will be maintained in this year’s budget while the subsidy increase for established homes is scrapped.

Ms Kevans expects the RBA to cut the cash rate by 50 basis points to 2.5 per cent in the second half of 2009.

www.thewest.com.au

Read Full Post »