The Reserve Bank board has flicked the switch to higher interest rates effectively ruling out further cuts as house prices and retail sales soar toward record highs.
The Bank's announcement mid-afternoon pushed up the Australian dollar 1 complete cent to more than 0.84 US for the first time since the start of the financial crisis. The share market climbed another 1 per cent to its highest point since November.
Tuesday's Reserve Bank board statement was the first in six months to announce neither a cut in rates nor the contemplation of a further cut.
Instead the board expressed concern that improving conditions might "impinge on prospects for sustainable growth and achieving the inflation target," enough to make the market price-in an even money chance of a rate hike in November...
...and a total of 2 percentage points of rate hikes by end of the next year.
Such an increase would push standard variable mortgage rates back up above 7 per cent by late next year and add $300 to the monthly cost of servicing a $300,000 loan.
Adding weight to the Bank's contention that "the risk of a severe contraction in the Australian economy has abated," retail figures released as the board met showed spending in NSW climbing to yet another record high. National spending slipped 1.4 per cent in June but remained more than $1 billion above where it was before the onset of the financial crisis.
Discounting associated with winter sales meant that the amount of goods bought continued to climb even though the total spent spent slipped with the Bureau of Statistics estimating that the volume of goods sold climbed 2 per cent between March and June.
Discretionary or "luxury" purchases climbed the fastest, with sales of watches, jewelery and flowers up 6 per cent, sales of sports goods, toys and cameras up 5 per cent and spending at cafes and restaurants up 3 per cent.
"It's a turnaround," said Commonwealth Securities economist Savanth Sebastian. "At the height of the crisis households were largely focused on spending on necessities and saving for a rainy day. Now they are treating themselves to life’s little luxuries."
Also released as the board met was official confirmation of private surveys showing house prices soaring back to pre-crisis levels. The Bureau's weighted average of Sydney house prices jumped 4.9 per cent between the March and June quarters, its biggest jump since the height of the real estate boom in 2003. The Sydney index is now just 2.8 per cent short of its all-time high.
Every city recorded solid house price gains in the quarter, even the previously ailing real estate markets of Perth and Brisbane. Melbourne house prices recorded the biggest gains, jumping 5.2 per cent.
Deutsche Bank economist Tony Meer said that far from welcoming the higher prices, the Reserve Bank would be concerned and pointed to last week's speech by Governor Glenn Stevens who said it would be "very disappointing, indeed quite disturbing" if the recovery merely boosted house prices without providing many more dwellings".
Published in today's SMH and Age