Interest rate rise moves closer

Most economic indicators are now aligning in the same direction and pointing to a strong year for the Australian economy. But for home loan borrowers this means the interest rate rise that has been hanging around on the horizon for the past couple of months has moved closer.

Economic growth is up, the job market continues to boom and, after the warning on inflation from the Reserve Bank last week, we should prepare for another 0.25 percentage point rise in interest rates before mid-year. Perhaps even before Easter at the next RBA board meeting on April 4.

Adding to the economic picture this week has been the Westpac-Melbourne Institute leading index of economic activity – pointing to accelerating economic conditions for the rest of 2007. The index rose again in January, although not as much as the month before, and portends economic growth rates well above average this year.

Housing remains the odd sector out, dwelling commencements slipped again in the December quarter, down 0.8 per cent. This continued a sliding trend in the latter half of 2006 as the impact of three interest rates rises was felt in the housing market. New houses and apartments both fell.

The outlook for the housing market hangs in the balance in 2007. The economy in general is motoring along, and there is a stellar job market giving us the lowest unemployment in decades. This would suggest some stimulus to a flat housing market. But just as construction might be expected to be shaking off the impact of last year's rate rises comes the prospect of further interest rate action from the RBA, which, if it eventuates, will continue the drag on construction this year.