Interest Rate Rise Hurting Australian Households

A month ago the Reserve Bank acknowledged that interest rate rises were hurting Australian households - at a time when fuel and food costs were also mounting.  A more stable interest rate environment into the second half of the year was needed.

HIA voiced concerns that the interest rates had gone too far!

Since then consumer confidence has tumble, retail spending has slowed and the impact of the US sub-prime crisis continues to flow on to Australia. 

Secondly, business and investor confidence is low, listed companies are almost universally downgrading profit forecasts and signs of a weakening labour market are emerging.  The economy is slowing.  The AIG-HIA Performance of Construction Index contracted for a fifth consecutive month in July. (click here for more)

Thirdly, there is now a high level of attention on the banks themselves.  A report by PriceWaterhouseCoopers earlier in the year found that Australian banks have the second highest rate of return on equity in the world, posting a record $5.4 billion in profits in the six months to March.  Yet banks argue that global credit costs could affect their margins and thwart an automatic flow on of lower interest rates.

HIA responded by questioning the level of competition in the Australian banking sector arguing that “if the RBA can’t ensure the banks follow suit with rate reductions when set, then more competition in the banking sector may be necessary”. (Quote by Dr Ron Silberberg, HIA Managing Director - click here for more)

Fourthly, housing starts continue to fall across Australia.  And in NSW alone HIA forecasts a shortfall of 19,000 new homes in 2008/09, adding more pressure on an already deficient house stock and condemning the rental crisis to lower depths.

Importantly, the Reserve Bank has signposted a fall in interest rates.  The question is when?

In the meantime, consumers should take some confidence that interest rates have peaked, that the next movement should be down and that the Federal Government is eyeballing the banks