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Brokers and borrowers adopt a watching brief, with a less pro-active stance expected – at least for the moment – from the RBA, writes Jessica Darnbrough
WHEN THE Reserve Bank of Australia (RBA) lifted interest rates in November 2010, it did so for one reason: to rein in the pace of the nation’s economic growth.
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Fortunately, the 25 basis point hike managed to do just that.
Data from the Australian Bureau of Statistics (ABS) show Australia’s economy is currently smarting from higher interest rates, a still fragile global economy and a strong currency.
In November, the Australian dollar reached parity with the greenback, before slipping back to around 98 cents, where it has since hovered consistently.
In addition, the government has now all but withdrawn its fiscal stimulus, which is expected to keep economic growth cool for the first part of 2011 before things start to heat up again in the second half of the year.
So, while the short-term outlook is uninspiring, the mid-term forecast is more promising, with the effects of solid mining investment expected to become increasingly evident in subsequent quarters. This will push the economy closer to full employment, keeping the central bank on the alert for inflationary pressures.
While the unemployment rate rose 0.2 per cent in October 2010 to 5.4 per cent, NAB’s chief economist Alan Oster says we should expect to see unemployment at approximately 4.75 per cent by mid-2011.
This will likely encourage the RBA to lift rates once again in March or April.
Overall, the cash rate is expected to rise by 75 basis points to 5.5 per cent by December 2011, which would take the average standard variable mortgage lending rate to 8.5 per cent.
Currently, the average standard variable rate of the major banks sits at just above 7.7 per cent.
NAB offers the cheapest rate at 7.67 per cent, while Westpac still boasts the most expensive standard variable rate at 7.86 per cent.
If rates do increase by 75 basis points during the next 12 months, Australia can expect to suffer a further drop in new home sales, according to the Housing Industry Association’s chief economist, Harley Dale.
ABS data show new home sales rose in October 2010, but that was not enough to lift the gloom that has settled over the industry as rising rates continue to stifle demand.
Over the three months to October 2010, new home sales fell by 9 per cent, sitting 17 per cent lower than during the same three-month period in 2009.
This statistic is expected to deteriorate as we move into 2011.
According to Mr Dale, severe credit constraints, as well as inadequate progress in addressing perennial supply side obstacles – such as a lack of readily available, affordable land – will render Australia’s new home building recovery unsustainable.
