Interest Rate Update 2/7/08

Interest rates may have peaked?


The Reserve Bank is fuelling the theory that interest rate rises may have peaked, amid more evidence of a weakening housing market and renewed concerns about the credit system...

Following the decision to hold the official cash rate at 7.25 per cent yesterday, the bank's governor, Glenn Stevens, acknowledged a deteriorating credit market, slower lending to households and businesses, subdued consumer spending, and "tentative signs" of weaker job growth.

The dollar fell as money market dealers reduced their bets of a rate rise later in the year.

July is the fourth successive month the Reserve has left rates on hold, after increases in February and March.

A statement explaining the decision contained a slight shift in tone from previous communications, enough to convince some economists the Reserve thought the economy was slowing enough to curb inflation.

"We think rates are on hold, probably for a 12-month period," the co-head of economic and market analysis at Citi, Stephen Halmarick, said.

The statement said inflation was likely to remain relatively high in the short term, boosted by rising oil prices, but "looking further ahead, inflation in both CPI and underlying terms should decline over time, provided demand continues to evolve as expected."

The equivalent passage in the June statement was tougher: "Should demand not slow as expected, or should expectations of high ongoing inflation begin to affect wage and price setting, that outlook would need to be reviewed."

But the central bank once again stressed "considerable uncertainty" about future inflation and demand.

The head of markets research at NAB, Peter Jolly, said credit conditions had worsened in the past month, after an improvement between March and June.

The weakness is driving up funding costs for banks. On NAB's measure, two- and three-year bond yields offered by Australia's big banks are about 200 basis points higher than the government bond. At the start of June, the spread was 170 basis points.

"The liquidity crisis has been averted but the cost of credit issue hasn't," Mr Jolly said. Banks would lend to each other, but at higher prices, he said.

The weakness is flowing through to housing. The Housing Industry Association said yesterday that the sale of new houses in NSW fell 9.4 per cent in May - the fourth drop in five months.

The co-head of Australian economics at ANZ Bank, Sally Auld, said the bank would stick to its prediction of two rate rises by the end of the year, at least until the next inflation reading on July 23. She said it would be hard for the Reserve to ignore inflation at 1.3 per cent for the quarter.
SOURCE: Jacob Saulwick - Sydney Morning Herald

Interest rate jitters send home owners in a "re-financing"spree.

 The recent interest rate increases and threat of further rate hikes are taking a toll on homeowners, as shown by the massive jump in refinancing commitments. The number of loans for refinancing purposes surged by 10.6% in November - the biggest increase in six-and-a-half years according to recent data from the Australian Bureau of Statistics (ABS). Craig James, chief economist with CommSec, said the most recent rate hike in November prompted more borrowers to either shift loans to another lender or seek better terms. "The upsurge in refinancing activity is a very positive development, indicating that people are keen to get their financial houses in order so that their lifestyles aren't adversely affected by rising interest rates," James said. "Borrowers aren't sitting around; they're actively refinancing loans to ensure that rising interest rates don't cramp their lifestyles."

The number of new housing loans was also very strong, rising by 4% in the same month. Tasmania recorded the highest rate of growth of almost 10%, followed by Victoria with a 4.7% increase.

The ABS data also showed a significant increase in the proportion of borrowers taking out fixed rate loans - jumping to an eight-year high of 24% from 21% in October.

"Home loan borrowers clearly have had enough of rising interest rates, with one in four opting in November for fixed term rather than variable rate loans," James said.

However, falling affordability continues to haunt first homebuyers, with the proportion of first-time buyers dropping from 18.7% to 18.3% in November. Potential homebuyers cancelled $1.9bn worth of previously committed loans in November - a whopping 19.7% compared to a year ago.