Colin Brinsden – The Courier-Mail

Economists say the latest housing data is likely to prompt the RBA to lift its official cash rate / File

• Housing data points to rate rise 
• “Biggest monthly price hike in five years”
• Experts predict rate rise

RISING house prices and improving credit demand could sway the Reserve Bank of Australia to resume lifting its official cash rate at its meeting next Tuesday.

New data released today showed house prices posted their biggest monthly increase in at least five years in January, while consumers appeared to be regaining confidence in taking on credit despite last year’s interest rate rises, The Courier-Mail reports.

The reports came on top of this week’s stronger-than-expected construction and capital expenditure data, upbeat business investment plans for the next 18 months and recent robust labour force data.

Still, pricing on financial markets suggests the rate decision will be a line-ball call as to whether the central bank lifts the cash rate by 25 basis points to 4.0 per cent at its meeting.

“On balance we expect the Reserve Bank to lift rates next week, but we don’t hold the view with supreme confidence,” Commonwealth Securities (CommSec) chief economist Craig James said.

Likewise, JP Morgan chief economist Stephen Walters viewed the decision as “something of a coin toss”.

“Our forecast is that the RBA will leave policy steady on Tuesday although, like that of the market, our level of conviction is low,” Mr Walters said.

“The case for a further rate rise is convincing, but it was even stronger back in February when the RBA bucked unanimous expectations for a fourth straight hike.”

Still, whether or not the there is a rate rise next week, RBA Governor Glenn Stevens has made it clear that there will be further increases this year given that lending rates are still 50 to 100 basis points below their decade average.

Despite the three rate rises in as many months late last year, there was a modest improvement in credit demand in January, RBA data showed.

Total credit rose by 0.4 per cent in the month, double economists’ expectations and the fastest pace of monthly growth in a year.

Demand for housing loans lead the way, rising 0.7 per cent and matching December’s growth despite the end of the government’s increased first home owners grant at the end of last year.

Other personal loans rose by 0.5 per cent, lifting the annual rate to 0.2 per cent, the first positive yearly rate since September 2008.

But business credit growth fell a twelfth consecutive month.

Also released was the RP Data-Rismark Hedonic Australian Home Value Index – Australia’s largest property database – which showed home prices rose by 1.8 per cent in January, the biggest increase in the five-year history of the series.

Home prices were up 11.8 per cent on a year ago, the fastest rate in 22 months, although CommSec’s Mr James pointed out that prices are coming off a low base.

He said the strong gains represent “great news” for homeowners, serving to boost wealth levels and confidence.

“While budding home buyers would prefer prices were a little lower, its clear that they wouldn’t be keen to get in the property market if prices were going backwards.”

PETER MARTIN

The Reserve Bank has produced the first public estimate of the number of times it expects to raise interest rates in the coming months.

Its governor, Glenn Stevens, told the Parliament’s economics committee yesterday he expects to do it between two and four more times.

Declaring the financial crisis over, and telling the committee it had only ever been a global crisis for six to eight weeks, Mr Stevens said the cash rate had to move away from its ”emergency settings” and increase by 0.5 to 1 percentage points so that consumer and business rates would return to their long-term average, ”which I think is the appropriate place to be”.

Another two to four rises of 0.25 points would add a further $95 to $190 to the monthly cost of servicing a $300,000 mortgage, but would, importantly, leave repayments several hundred dollars below where they were before the crisis began.

The future of rates beyond that would depend on the bank’s assessment of wage and inflationary pressures and the institutions with which borrowers had their accounts.

”We have really had 3½ rate moves so far, or if you are a customer of Westpac, four,” the governor told the committee.

Mr Stevens was relaxed about government debt, saying it was so low that on one reading of proposed new international banking standards Australia did not have enough government debt to sell the banks the safe securities they would need.

Asked to respond to a claim by the Coalition frontbencher Barnaby Joyce that Australia was at risk of defaulting on government debt, he said there were ”few things less likely than Australia defaulting”.

Reminded that Senator Joyce was the shadow finance minister, he said he had ”yet to meet a finance minister who has ever mused any possibility about debt default of his own country”.

Commonwealth Bank of Australia says it can’t guarantee that increases in its home lending rates won’t exceed those made by the Reserve Bank.

All big four banks have said that variable mortgage rates may have to rise faster than the Reserve Bank of Australia’s rate increases because of funding pressures.

‘‘If we have to move standard variable above the OCR (overnight cash rate) then we will have to do that,’’ chief executive Ralph Norris said in a phone conference after releasing the bank’s September quarter earnings update. ‘‘We’ve seen significantly higher levels of term deposit rates.

‘‘If you look at wholesale margins, they’re still significantly up over where they were two years ago.’’

He said the RBA’s cash rate no longer set retail or wholesale rates in the way it used to before the financial crisis started two years ago.

CBA, the country’s biggest home loan lender, and the other three major banks last week increased their standard variable mortgage rates by 25 basis points after the Reserve Bank raised the cash rate by the same amount.

The big four banks did the same in October after the RBA’s 25 basis point increase at the time.

Mr Norris said deposits, one of the major sources of bank funding, were were now 0.75 to one percentage point more expensive for bank than before the global financial crisis.

CBA chief financial officer David Craig said it would take another 18 months before the average cost of wholesale funds stopped rising.

Wholesale funding is sourced from fixed interest investors here and overseas.

The average cost of funding has been rising for banks as they roll over cheap term debt sourced before the global financial crisis with more expensive borrowings.

While the cost of debt has fallen from the extreme highs at the height of the crisis, the cost is still higher than two years ago, which continues to raise the average cost.

The average term debt before the financial crisis was 3.6 years, with some of that having a maturity of five years, Mr Craig said.

‘‘So we’ve got five years from the beginning of the crunch before the last of the cheap stuff’s gone,’’ Mr Craig said.

The cost was likely to stabilise about three and a half years after the start of the crisis, he said.

CBA was criticised in June after it raised its variable rate by 10 basis points because of margin pressures.

After the increase it still had the equal lowest rate to rival National Australia Bank. Before the increase, CBA’s rate had been the lowest among the banks.

Since then, the RBA increased its cash rate twice by 25 basis points in October and November, taking its benchmark rate to 3.5 per cent.

AAP

Home-loan demand jumped at its strongest pace in six months in September as first-home buyers rushed to take advantage of generous government handouts, keeping the market on edge for a possible rate hike next month.

The strength of the housing market was backed up by figures that showed lending for construction for new homes in September rose to its highest level in about 15 years.

Still, a private-sector survey said there was a pullback in the jobs market in October after steady gains in the past two months, pointing to some downside risk for official employment data due this week.

“For the time being, though, the need to unwind the large monetary policy stimulus in a ‘timely’ manner now that the risk of serious economic contraction has passed will be the primary concern of the RBA,” said Joshua Williamson, analyst at Citi. “We expect a steady stream of 25 basis point rate increases to 4.50 per cent by the end of the second-quarter of 2010.”

The Reserve Bank last week raised the cash rate by a quarter of a percentage point to 3.50 per cent, tightening policy for the second straight month and going further than any other central bank in the Group of 20 to raise rates since the global financial crisis escalated last year.

Implied rates, based on money market and swap rates, are pricing in a 70 per cent chance of a quarter percentage point rate rise next month, up from around 56 per cent last week. They showed little reaction to the data.

The dollar rose on the back of the the housing numbers, closing today at 92.5 US cents, more than a cent higher than on Friday.

Over the next 12 months, markets are pricing in nearly 170 basis points of rate increases. That would take the cash rate to around 5.25 per cent – a level widely seen as neutral or the “normal” cash rate.

The central bank has already voiced concerns that keeping rates too low for too long could give rise to a housing bubble. The solid demand for homes in the past year has been attributed to strong population growth and mortgage rates at 50 year lows.

Government data on Monday showed the number of home loans jumped 5.1 per cent in September, the biggest rise since a 5.3 per cent increase in March. The result easily beat forecasts for a 3 per cent rise and came ahead of an imminent phasing out of a generous government handout to first-home buyers.

First-home buyers accounted for more than a quarter of total loans in September.

While analysts say a halving in the government grant to $7000 from October 1 onwards and tighter monetary policy will ease home loan demand, builders appear optimistic.

Lending for construction to build new homes jumped 8 per cent in September to $7.2 billion, its highest level since December 1994.

“The scene is set for a housing construction boom,” said Andrew Hanlan, senior economist at Westpac. “The upswing, to kick-in from late 2009, will be a key growth engine of the Australian economy through 2010.”

Jobs data crucial

A resilient jobs market has also supported the housing sector.

While the jobless rate in the United States jumped in October to a 26-year high of more than 10 per cent, the jobless rate in Australia is 5.7 per cent.

The official employment report due on Thursday is expected to show the jobless rate edged up in October to 5.8 per cent as the economy shed 10,000 jobs in payback for September’s stunning gain of 40,600.

A survey by ANZ out today showed job advertisements in newspapers and on the internet dipped in October, ending two months of gains. Ads were down 42.3 per cent on October last year.

“These results highlight that the recovery of the Australian economy is still vulnerable to setbacks,” said Warren Hogan, acting chief economist at ANZ. “In the near term, we do not expect to see much improvement in the official labour market statistics.”

Hogan noted job advertising tended to lead actual employment outcomes by around six to nine months. As such, he expected a broadly steady jobs market over the course of the southern hemisphere summer with a further small increase in the national unemployment rate to just above 6.5 per cent in mid-2010.

Still, another strong jobs report on Thursday would raise the risks of another rate increase in December. On the other hand, a weak report could put the central bank on hold till next year.

“The employment data, if unexpectedly soft, could be enough to trigger a pause in December,” said Stephen Walters, chief economist at JP Morgan.

Reuters

RBA emergency rate level lifted 25 basis points to 3.25 per cent.

The Reserve Bank of Australia today raised the official interest rate from its lowest-ever point, amid signs of a strong local recovery.

The move is in stark contrast to last year, when the RBA joined the rest of the world in slashing interest rates to confront a rapidly escalating global financial meltdown.

The dramatic action saw the official cash rate plunge to a 49-year low of 3 per cent.

This marks the first rate rise since March last year.

How will the rate rise affect you?
We all feared a rate rise was on its way. We ask our finance expert how the lift will affect you.

Does this mean the ‘emergency’ is over? Last week’s better-than-expected retail sales figures from the ABS and yesterday, ANZ job advertisements rose 4.4 per cent in September.

Economists from JP Morgan and Macquarie Group predicted that the RBA board would approve a rate hike today.

Today’s interest rate rise could mean a back-to-back affair, with a follow-up in November on Melbourne Cup day.

Housing bubble

There have been reports that the RBA is primarily worried about a housing bubble and wants to increase rates to pull prices in. But not everyone agrees.

Stephen Koukoulas, chief global strategist at TD Securities, says RBA governor Glenn Stevens has a bee in his bonnet about housing.

He has written an open letter to the RBA board arguing against the rate hike.

Mr Koukoulas warned that premature action could risk a “double-dip recession”.

“When you look at things like full-time employment, you look at what’s happened to consumer spending now that the fiscal stimulus measures are starting to fade,” he said.

“And again you look at what’s happened to the export sector and the very overvalued Australian dollar.

“This interest rate hike could really run the risk of whether you call it a double-dip recession or a W shaped growth performance, there’s a real risk that the Australian economy could buckle under a premature tightening in policy.”

Treasurer Wayne Swan remains cautious about the economy.

“We know the global economy is fragile. That is why everybody needs to work together in this environment.”

Prime Minister Kevin Rudd has likened the world financial crisis to a “cancer” which has spread to the Australian economy.

He also defended the government’s decision to implement a $10.4 billion economic stimulus package ahead of official data to be released next month revealing the strength of the local economy.

Mr Rudd said financial institutions had spread around the risk of “dodgy loans” made in the US.

“When the original mortgage payments couldn’t be made, the cancer didn’t just stay local, it spread across the world to all the other institutions that had been wrapped up in it,” he told Sky News today.

The crisis was now affecting the real Australian economy.

Mr Rudd is resisting calls from the opposition for the release of Treasury advice the government received in developing its stimulus package.

Updates would be included in the mid-year economic forecasts, due for release next month, he said.

But the government could not wait for “final, conclusive proof of economic problems” before taking action, Mr Rudd said.

“Guess what, by then it’s too late, you need to act decisively and early because it takes some time for these stimulus measures to flow through to the economy.”

“The logic of the Liberal Party’s position is this, they would say that you should wait until basically the car starts to sputter through lack of petrol in the tank before you put more petrol in.”

When pressed about what the government was doing to help self-funded retirees weather the financial crisis, Mr Rudd said the government was maintaining the stability of the financial system.

Guaranteeing bank deposits would help them, he said.