Thursday, May 13, 2010

That link between fiscal and monetary policy - it's baaaack! Swan says so.

Treasurer Wayne Swan has held out hope of restraint from the Reserve Bank as new figures emerged showing home lending tumbling to nine-year lows.

Asked at the National Press Club what impact his budget would have on interest rates Mr Swan said he thought its fiscal restraint would be "welcomed by the Reserve Bank".

"This is the largest fiscal consolidation since the early 1960s," he said. "We have put in place a medium term plan which I think would give everyone confidence we are absolutely serious about fiscal discipline."

"We understand the need for settings that put maximum downward pressure on inflation and therefore maximum downward pressure on rates. But at the end of the day the Reserve Bank takes its decisions independently."

The prospect of spending restraint leading to interest rate restraint was spelled out by Reserve Bank Governor Glenn Stevens in February when he told an international symposium to expect "a lengthly period of rather low short-term interest rates" if governments committed themselves to repairing their budgets...

His speech included the disclaimer that it was "not intended to provide any particular message about current issues for monetary policy in Australia".

Figures released as the Treasurer conducted a round of media interviews to promote the budget showed new lending for housing sliding to a nine-year low.

Lending to buy homes plunged 4.5 per cent in March to be down 24 per cent in six months.

"The cumulative interest rate hikes are taking their toll," said Commonwealth Securities economist Savanth Sebastian. "No doubt the likelihood of further rate hikes and the substantial growth in house prices are making potential buyers rework their sums."

Mr Savanth said the Reserve Bank now had "plenty of reasons to pause" in its process of increasing interest rates.

"Not only is housing lending sliding, but retail spending, building approvals and gauges business activity have been soft. It may prove a temporary weakness, but the Reserve Bank should be safe rather than sorry."

Against the trend in lending to owners, lending to investors climbed a further 3.3 per cent to its highest point in more than two years.

Four out of every ten dollars lent to buy a house are now lent to investors, up from three in ten a year ago.

But disturbingly borrowing by investors to construct houses was unchanged on a year ago, meaning that none of the extra $1.5 billion borrowed by investors will itself create more houses.

Housing Industry Association economist Harley Dale said the trend was "worrying" and did "nothing to instil confidence in the prospects for a recovery in new residential construction that extends beyond this year".

Published in today's SMH 

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