Growing concern over impact of interest rate rise

4 April 2005

The Reserve Bank has been warned against lifting interest rates this week with economists and banks increasingly concerned the economy is sliding to a halt.

While many economists expect the bank to increase rates by another 0.25 percentage points on Wednesday morning, there is a fear it may be too much for borrowers, home owners and the general economy.

The bank lifted rates last month for the first time since December 2003, highlighting concerns about domestic demand and Australians' unquenchable desire for cheap imported goods.

It also fears Australia's low unemployment rate, and the shortage of skilled workers, will lead to a breakout in wages-led inflation.

Access Economics, in its latest business outlook report, said the Reserve Bank had erred last month because the economy was already slowing.

It said the two rate rises of late 2003 had worked better than anticipated.

Another rate rise now, on top of last month's, would only cause problems.

"We hope the Reserve (Bank) will come to its senses sooner rather than later, and that Australian short rates will rise no further in 2005," the report said.

"But don't bet on it - the Reserve has a bee in its bonnet."

One of those bees was highlighted by the United States Federal Reserve, which last week warned of inflation flowing through the American economy in months to come.

Westpac global head of economics Bill Evans said the Federal Reserve's concerns would weigh heavily with its Australian counterpart.

But he said the Reserve Bank may hold fire this month - and indeed for the rest of the year - because of growing evidence the economy was slowing.

"We expect that the RBA will be cautious and wait for further evidence of the impact of the first 0.25 percentage point move," he said.

A poll by mortgage provider Wizard Home Loans suggest Australians have already made up their minds about what the Reserve Bank will do this week.

In a survey of 400 people, 60 per cent said the Reserve Bank would lift rates by 0.25 percentage points come Wednesday.

And of those who expect a rate rise this week think there will be at least another by year's end.

"This survey shows consumers are gearing up for another rate hike," Wizard chairman Mark Bouris said.

Mr Bouris said he believed the Reserve Bank might wait until June or July, largely because consumer confidence had slid since last month's rate rise.

National consumer advocacy manager with Resi Mortgage, Lisa Montgomery, said the Reserve Bank had to look more carefully at the impact of its decisions on the property market.

"Rising interest rates, softening property prices and prohibitive taxes, particularly in NSW, are combining to make it very difficult for investors, particularly the mum and dad investors who don't have the luxury of deep pockets," she said.

"While the Reserve Bank has the bigger concern of inflation and consumer spending to focus on in making interest rate determinations, it is important that all key decision makers continue to closely monitor the direction of the property market."