This year ‘nirvana’, next year rising rates?

A rebound in economic growth and the never-say-die jobs market provide a gentle warning this week that home loan interest rates may not be as frozen as many borrowers have hoped. While there remains little prospect of further interest rate rises in 2005, the latest economic data increases the chances that rates may still have further to rise in 2006. For now, this has put paid to predictions that the next move in variable rates may be down.

Economic growth bounced back in the June quarter, with GDP posting a very solid 1.3 per cent rise over the three months. This lifts the annual growth rate to 2.6 per cent from the sluggish 1.9 per cent as at March. Business investment recorded a healthy 6.8 per cent rise, government spending rose unexpectedly, and the sectors dragging the economy down previously – housing construction and household spending – were also up.

When combined with the latest bumper jobs growth figure for August, it really looks like the slowdown in the economy from mid 2004 into 2005 is behind us. Another 32,600 jobs were added in August, continuing the inexorable rise in employment in Australia over the last two years. The only thing that has stopped unemployment from falling below 5 per cent is the surge in participation – the optimism for job seekers has brought many more Australians back into the market seeking work. The 0.5 per cent rise in the ANZ monthly job ads survey also suggests there are still more jobs to come in the ensuing months.

Our 2005 low-inflation, solid growth “nirvana”, as RBA governor Ian Macfarlane describes it, should be enjoyed but borrowers and consumers in general should not expect it go on indefinitely. While inflation remains surprisingly subdued, we can't count on it to stay in check indefinitely. There may well be some inflationary dangers looming in 2006 from a tight labour market and sky-high petrol prices.

Housing finance produced mixed results in July, but the overall picture remains one of resilience with demand for home loans holding up. Total value of dwelling finance commitments excluding alterations and additions fell by 1.6 per cent. But this decrease was due to another fall in investment housing commitments of 5.6 per cent, offsetting the slight rise of 0.3 per cent in owner-occupied home loans. The number of loan commitments for owner-occupiers increased by 0.2 per cent in July, although the number excluding refinancing fell by 1.4 per cent.

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