homeowners can rest easy with rates steady for now

  1. 6,368 Posts.
    By Caroline Adam
    SYDNEY, Dec 30 AAP - Homeowners need not contend with larger
    mortgage repayments just yet, with interest rates expected to
    remain steady well into the next year.
    As various hotspots in the Australian economy show signs of
    cooling, analysts are pushing their forecasts for higher rates
    further back into 2005.
    On several occasions in 2004 the Reserve Bank of Australia (RBA)
    reiterated it still had a bias to lift rates but left the official
    cash rate on hold at 5.25 per cent, with no movement since the two
    25 basis point hikes of November and December 2003.
    In its most recent quarterly monetary policy statement published
    in November, the RBA said that while there was no urgency to raise
    rates at this stage, it was likely the economy would require higher
    rates at some stage of the current expansion.
    Analysts believe that while a recent string of soft economic
    data is keeping the RBA on the sidelines for now, the case for
    higher rates remains intact as inflation shows signs of trending
    up.
    "The run of recent numbers has been on the weak side,"
    Commonwealth Bank chief economist Michael Blythe said.
    Retail sales figures have come in on the weak side of
    expectations for five consecutive months while on the housing
    front, building approvals have recorded seven consecutive monthly
    falls.
    The latest figures on Australia's rate of economic growth have
    also come in softer than expected.
    Mr Blythe predicted the RBA would lift rates in either February
    or March - the central bank does not hold a board meeting in
    January - but said the odds of it happening later had gone up.
    "The risks to our forecasts for the March quarter are to push it
    back again, particularly if the data remains on the soft side," he
    said.
    "The emerging argument is that maybe the stronger Australian
    dollar again reduces that need to move in too much of a hurry."
    However the key fundamentals in the economy still looked very
    supportive of higher rates, Mr Blythe said.
    "Real wages are rising, employment is rising, unemployment is
    very low, consumer confidence is high," he said.
    While housing was set to slow, the strength of demand for new
    housing coming through from high levels of immigration and some
    pent-up demand from first home buyers should put a floor under
    that, he said.
    "Basically the economy is still in good shape - there are some
    signs of inflation risks starting to build," he said.
    With the unemployment rate at a new cyclic low of 5.2 per cent,
    the risk is that wage increases will accelerate, setting off an
    inflation spiral.
    Citigroup director Paul Brennan said that with a strong global
    backdrop and a tight local labour market, inflation was likely to
    trend upwards and therefore rates were set to rise.
    He expected the RBA to lift rates by 25 basis points in the June
    quarter, with a possible follow-up increase of the same amount in
    the September quarter.
    "One of the reasons why the interest rates rises people were
    expecting have been pushed back is because the impact of the
    earlier rate rises has been bigger than we thought," he said.
    With the housing market still feeling the impact of those rate
    rises, a genuine reassessment of the prospects for capital gains
    was going on at the moment, he said.
    Macquarie Bank senior economist Brian Redican said the weakening
    housing market should begin to see some strength in the second half
    of 2005.
    That and a tighter labour market should justify a modest
    tightening policy by the RBA, he said.
    Mr Redican predicted the central bank would raise rates in two
    25 basis point moves during the June quarter and September quarter.
    "But the recent run of data has reduced the likelihood of that
    occurring," he said.
    However AMP Capital Investors chief economist Shane Oliver said
    economic conditions should remain reasonable in 2005.
    "While the slowdown in housing investment will detract from
    growth, this should be made up for by strong business investment,
    reasonable consumer spending and a gradual upswing in exports as
    mining sector capacity improves," he said.
    "Consequently, unemployment is likely to slip below five per
    cent and contribute to a modest acceleration in wages growth."
    While the RBA may well act in the first half of 2005, the actual
    strength of the economy was still in doubt, Dr Oliver said.
    "In Australia, a return to stronger growth, along with slowly
    rising inflationary pressures, will lead to one further interest
    rate rise in the next six months," he said.
    "However, this is not a high confidence call and given the
    conflicting signals on the Australian economy, it wouldn't be
    surprising to see another year of unchanged interest rates."
    AAP
 
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