Thursday, March 13, 2008

It's over. After 12 successive interest rate rises

A dramatic collapse in consumer confidence has caused Westpac to declare that Australia’s record run of 12 consecutive interest rate rises is over. The bank says the next move in professional interest rates will be down - most likely in the second half of next year.

The Reserve Bank’s latest rise of 0.25 per cent has been amplified by the private banks who this week lifted their mortgage rates by between 0.30 per cent and 0.35 per cent - pushing their standard variable rates well above 9 per cent.

The Westpac-Melbourne Institute consumer sentiment survey, conducted within days of last week’s move by the Reserve appears to show that that hike – the fourth in eight months – broke the back of consumer confidence.

The Consumer Sentiment Index collapsed 9.1 per cent on the February result, and 21 per cent on the December result – the sharpest three-month fall since the mid-1970s oil crisis and spiral of inflation and unemployment presided over by the Whitlam government in 1975...

Every component of the Index plummeted. The assessment of family finances slid 15 per cent in the month and is down 25 per cent since the start of this year. The assessment of whether now was a good time to buy a major household item slid 11 per cent over the month and is down 29 per cent since the start of the year.

Mortgage holders suffered the biggest collapse in confidence, down 12 per cent over the month and 31 per cent over the year. Even Australians who had paid off their houses and were mortgage-free suffered a 6 per cent drop in confidence over the month and 22 per cent drop over the year.

Describing the results as “extraordinary” Westpac’s chief economist Bill Evans said they reflected not only the succession of mortgage rate hikes but also the global financial crisis which had precipitated the biggest fall in the Australian share market since the 1991 recession.

“In any interest rate hike cycle there will be one move - usually the last - when the effect is substantially greater than the effect of any previous move. This result probably signals that the Reserve Bank has tightened for the last time in this long cycle,” Mr Evans said.

Westpac’s assessment was backed up by Commonwealth Securities which said that consumer confidence had fallen to the level that historically tended to predict an economic slowdown.

TD Securities also declared that interest rates had peaked, predicting a cut as soon as late this year by which time it said growth would have weakened and inflation risks would have eased.

In Parliament the Prime Minister Mr Rudd said that the drop in consumer confidence combined with growing global uncertainty in financial markets reinforced the need for “responsible economic policy, prudent fiscal management and prudent management of the outlays of government”.

He refused to commit the government to supporting a claim by the Council of Trades Unions for a $26 a week pay rise for Australia’s poorest workers before the Fair Pay Commission.

“The government will be asking the Fair Pay Commission for a fair and reasonable outcome. We want an outcome that takes into account the cost of living pressures on working families and we want an outcome that takes into account the need for restraint,” he said.

“It is in that context that I again call on Australia’s business leaders to show some restraint when it comes to their salaries at the top end of remuneration. I do not want to see a situation where we end up with two Australias.”

At the Press Club the ACTU Secretary Jeff Lawrence called for an end to tax deductibility for pay packets of more than $1 million and noted that the head of the Fair Pay Commission Professor Ian Harper had recently been awarded a pay increase of $38,000 per year which he said took his pay for the part-time position to nearly $120,000.


Whatever you do, don’t take out a fixed-rate mortgage.

After six years of heading up, Australian interest rates are set to head down.

Perhaps not by the end of this year as TD Securities is telling its clients, but almost certainly by the end of next year as Westpac is telling its.

There may be one last hike in official interest rates (although I very much doubt it), and the banks themselves may independently tighten the screws one last time in order to try to restore their profit margins, but after that the worst will be over.

If you can survive with interest rates where they are or perhaps just little bit higher, you’ll survive.

Consumer confidence has plummeted into the range that brings on an economic downturn and is moving towards the range that presages a recession. It’s the sort of thing the Reserve Bank wanted.

Australians are not only telling the people who compile the index that they are planning to wind back spending, they are doing it.

Other figures out yesterday show that in the past five months we have cancelled or reduced $70 billion of credit. We are pulling in our horns.

Access Economics this morning predicts that retail spending is in the process of slowing to a crawl. It says by 2009 real spending should be climbing by just 1.8 per cent nationally, and by only 0.6 per cent in the ACT.

That’s right. Retail spending should hardly grow at all in the ACT. Access says Canberra residents are more sensitive to interest rates than most and we are about to hit with the results of the razor gang and a slow down in the construction boom.

While inflation won’t immediately fall back to where the Reserve Bank wants, it is about to lose its upward momentum.

The Reserve Bank’s problem is going to change from one of trying to rein in the economy to one of managing the slowdown.

It will begin scanning the employment figures as keenly as it has been scanning the inflation figures.

The next ones are out today. Employment has been climbing for an extraordinary 16 months. I wouldn’t be surprised if this month the run ends.