Rate rise - just a matter of time

This time a month ago there was a frenzy of speculation about an impending rate increase from the RBA. One month and more seemingly compelling data later, while it wouldn’t be fair to say it’s hardly causing a ripple, it certainly hasn’t received the same media attention. Maybe it’s last month’s story, or maybe borrowers have started to accept the inevitable. Last time around the RBA obviously felt that acting pre-emptively wasn’t warranted, and Ratewatch’s call was that it was just a matter of time. Importantly however, the RBA indicated that borrowers, and therefore the economy, were more sensitive to a rate rise now than it was at the bottom of the last rate cycle. The logic is quite simple: From such a low base, taking into account the massive increase in household debt levels that have occurred in the past three years on the back of spiraling property prices (themselves courtesy of low inflation, low interest rates and a sound economy) even a small increase in mortgage repayments would result in the RBA’s desired effect of slowing things down just a touch. Household debt is driving up the nation’s overall credit levels. All credit increased by 8.3% for the full year, with household credit doubling that figure to rise by 16.6% year on year. For those who’ve been on the moon over the past year or two, it is easy to establish where the funds are going: Housing approval figures released during the week showed a massive 46% jump over the past 12 months. So where does this leave the RBA in its deliberations next Tuesday? All the signs show an economy growing, a treasurer glowing, and real estate agents’ champagne flowing – surely making the task of sifting the Governor’s tea leaves a simple task. Well, that’s what we thought last time, and they held off, doubtless not convinced that the economies of the US, Europe and Japan were not showing a sufficiently strong recovery to justify the risk. However, this time around with inflation running around 3% and unemployment easing under 7%, the odds must be that the RBA will move by at least 0.25%. How much rates will have to move to turn the current real estate boom into a bang will remain to be seen, but an extra 1% on the Nation’s total housing debt levels will take more than a little of the gloss off consumer’s disposable spending.