Economic Wrap - April 2010

The Reserve Bank of Australia (RBA) pushed the official cash rate up 25 basis points to 4.25 per cent this week.

The hike to the cash rate was by no means a foregone conclusion with economists split over how the RBA would act in April. But an improving economy and a strengthening housing market – as well as growing retail sales over the earlier part of this year – were enough to prompt the RBA Board to bump rates up for the second time this year.

According to the Australian Bureau of Statistics, retail sales rose a higher-than-expected 1.2 per cent to a seasonally adjusted $20.14 billion in January from $19.91 billion in December, offsetting the 0.9 per cent fall in December.

Rates have now risen five times over the last six RBA Board meetings, and it would appear that the surging strength of our economy, the falling unemployment rate and rising home prices will prompt further rises as the year wears on.

Indeed, most major bank economists expect the official cash rate to settle around the 4.5-5.0 per cent mark by year’s end.

In his comments to the market following the March rate rise, RBA governor Glenn Stevens said the Australian economy continued to show signs that it was in “good shape” and “stronger than expected, after a mild downturn a year ago”.

“Investment in the resources sector is very strong. Credit for housing has been expanding at a solid pace, and dwelling prices have risen significantly over the past year,” Mr Stevens said.
While borrowers might be disappointed with the rate increase, at 4 per cent the cash rate is still well below its historical average and a long way off the 7.25 per cent it hit in March 2007.

There is also increasing competition in the mortgage rates offered by lenders with a considerable gap remaining between the standard variable rates of the major banks – so borrowers would be wise to explore whether their current mortgage is still the most competitive in the market and suitable for their needs.

If you’d like to run through your options, or discuss how the most recent rate rise will impact your mortgage and repayments, please feel free to give me a call.