Wednesday, December 09, 2009

Prepare to return to normal. We've done it.

Gruen's speech, below, is a bottler

Leading economists have forecast an upswing that will add more than $300 to the monthly cost of servicing a mortgage as the Reserve Bank Governor has spoken of the need for still higher "spreads" between what banks pay for funds and what they charge for loans.

The survey of the executive committee of Australian Business Economists released at its annual Sydney forecasting conference has the Australian economy bouncing back to near-normal growth of 3.2 per cent next year.

As a result the economists expect the Reserve Bank to push up its cash rate from 3.75 per cent to 4.75 per cent next year and then to 5.50 per cent in 2011.

The move would lift Westpac's standard variable mortgage rate from 6.76 per cent to 7.76 and then 8.51 per cent. The National Australia's Bank's 6.49 per cent rate would climb to 7.49 and then 8.24 per cent.

The extra monthly repayment on a $300,000 mortgage would amount to $190 next year and $340 by 2011.

At the conference Reserve Bank Governor Glenn Stevens warned of still higher mortgage rates as banks widened their margins in order to comply with proposed new capital rules designed to make them safer.

"The intention, after all, is that lenders will operate with more capital against the risks they are taking," he said...

"Capital is not free; shareholders have to be induced to supply it and it will have to be paid for."

"Customers of financial institutions - depositors and borrowers - will also pay via higher spreads between what lenders pay for funds and what they charge for loans."

The rules are outlined in a discussion paper sent to financial institutions by the Australian Prudential Regulation Authority. They are not yet in place and so cannot help explain Westpac's outsized December 0.45 point rate hike.

Treasury executive director David Gruen told the conference Treasury had underestimated the resilience of the economy in the May Budget but that without its $37 billion stimulus packages Australia would have been in recession in the December, March and June quarters of the past financial year.

Responding to critics who said Australia didn't need to do as much as it did, he said by doing what it did Australia achieved a "radically better outcome" than other advanced countries.

"The first and most obvious benefit is that unemployment is lower than it would otherwise be. Among other things this means less long-term unemployment and hence less skill atrophy and less general disaffection with society on the part of the long-term unemployed. Recessions break productive links between firms and between firms and workers, when firms that would otherwise be viable are driven into bankruptcy."

Winding back government debt would be easier if there was broad political and community agreement about the process of the kind Australia had enjoyed in the 1980s.

The ABE executive committee forecasts only a modest increase in unemployment from 5.8 to 6.2 per cent. It includes the chief economists of Westpac, ANZ, Commonwealth Bank, Citibank and Macquarie group.

Published in today's SMH and Age

ABE Forecasts

Australian Business Economists Annual Forecasting Conf 2009

See also: Treasury busts some stimulus myths - Bernard Keane, Crikey

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