Rate expectations remain firmly upward

Nothing has altered the outlook for rates substantially this week and the expectation remains firmly in place for more rate rises in coming months.

April housing finance figures showed a rise of 2.3 percent although, with two rate increases under our belt since then, they are not a great indicator of the current strength of the housing market. Nor are they of great value as an indicator of future rate moves.

High rates of loan refinancing within this figure also make them hard to interpret but the RBA will still have concerns about the heat in the housing market.

Last week’s March quarter GDP figure of 0.9 percent makes for annual economic growth of 4.2 percent. Together with resilient building approval figures and a rise in full time jobs on top of rising numbers looking for work mean that more rises are likely and sooner rather than later.

Home loan rates are now expected to rise between one and two percentage points over the next year. Just how much they do rise will depend on how strongly the Australian economy continues to perform and to what degree this translates into inflationary pressures.

With inflation already at the top end of the RBA’s target range of 2 to 3 percent, a healthy domestic economy, and growing signs of a synchronised world recovery, the balance of economic risks to Australia are now firmly skewed towards overheating.

More interesting will be what happens to credit card rates. Card rates did not fall by the full 2 percentage points of official reductions last year but are showing signs of matching this year’s rises in full, amounting to an increase in credit card margins for the banks.