Monday, August 15, 2011

Punters don't believe traders. "Rates are going up."

Money market professionals are banking on big rate cuts, but the rest of us don’t believe it.

A special question added to the latest Westpac Melbourne Institute consumer survey finds an overwhelming 73 per cent of us expect mortgage rates to climb over the coming twelve months, with 29 per cent expecting at least four hikes, pushing up mortgage rates more than one percentage point.

Four more hikes would add $200 to the monthly cost of servicing a $300,000 mortgage.

The Westpac survey finds just 11 per cent of us expect interest rate cuts, up from an even smaller 4 per cent when the question was last asked in June.

The survey found overall consumer confidence at recessionary levels with a near-record 36 per cent of those surveyed expecting worse family finances in the year ahead.

The futures market shares none of the pessimism on rates. Pricing late Friday assigned an extraordinary 87 per cent probability to a double rate cut of 0.50 points at the Reserve Bank board’s next meeting... The market is pricing in three rate cuts by October, four by November and five by February.

“Consumers can be excused for being in two minds,” said said Westpac economist Matthew Hassan. “Those picking increases look to the high inflation headline and the hawkish Reserve Bank rhetoric. Those expecting cuts point to the deteriorating domestic picture and threat from financial turmoil.”

Reserve Bank board minutes due tomorrow will be closely scanned for indications of the Bank’s thinking but they will be of limited usefulness given the financial turmoil in the fortnight since the board met.

Steven Koukoulas, until recently economic advisor to Prime Minister Gillard has pleaded with the Bank to start cutting rates in an open letter published over the weekend.

“Have a look at the following: house prices have fallen for six straight months; employment growth has stalled; retail spending has just had its weakest year in half a century and consumer confidence is at a level consistent with recession. What's more, corporate insolvencies are at the second highest on record, the stock market is weak and outside mining business confidence is in the doldrums,” he writes.

Published in today's SMH and Age

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