Greenspan warning puts pressure on rates

US Federal Reserve chairman Alan Greenspan has renewed fears of a prolonged US economic downturn saying that it is far from certain that his six interest rate cuts this year are enough to halt the US slide.

His comments underline the threat to Australia's recovery posed by the weak US and Asian economies.

An rise in bond prices in response to Greenspan's Congressional testimony has already had an impact on short term fixed rates. This is likely to flow through to 1-year fixed home and investment loan rates here, including introductory rates, especially if US economic data continues to support the downbeat assessment.

However, this hasn't yet changed our view on Australian variable rates with official interest rates forecast to remain on hold as the domestic picture continues to improve. The CPI figures for the June quarter out on Wednesday will be the next major pointer to the RBA's next move on official interest rates.

The National Australia Bank and Access Economics have upgraded their forecasts for economic growth this financial year (to 3.75% and 3.4% respectively) amid signs of growing business and consumer confidence. This is despite news the big retailers like David Jones and Harvey Norman are doing it tough.

The NAB's survey of business expectations showed that while trading conditions were poor last quarter, a solid bounce back is expected this quarter.

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