Economic wrap - Summer 2010

When the Reserve Bank of Australia (RBA) lifted interest rates in November 2010 it did so with one fundamental goal in mind: to rein in the pace of economic growth.

The RBA Board’s 25 basis point rate hike achieved that, which was one of the key drivers behind leaving rates on hold at 4.75 per cent in December.

Recently released data from the Australian Bureau of Statistics (ABS) shows that Australia’s economy is currently feeling the impact of higher interest rates, a still fragile global economy and a strong currency.

Growth in household consumption has almost halved in the past couple of months – dropping to 0.6 per cent from 1.4 per cent in October 2010.

In addition, last week’s national accounts found that the household savings rate is currently sitting above 10 per cent – suggesting consumers have lingering concerns about the global financial crisis and the direction of interest rates.

Most economists now believe the next tightening phase will begin in the June 2011 quarter, which will certainly be comforting news for home owners with mortgages.

HSBC chief economist Paul Bloxham says inflation will remain largely under control until mid-2011 when stronger economic growth will ultimately result in an upwards drift in inflation, which will argue the case for higher rates.

Currently, the unemployment rate sits at 5.4 per cent, after rising 0.2 per cent in October 2010. Employment growth has been very strong over the past year, and some leading indicators suggest the moderate pace of expansion will continue into the period ahead. Any boost in mining investment will ultimately push the economy closer to full employment.

NAB’s chief economist Alan Oster expects the unemployment rate to settle at 4.75 per cent in the New Year, which will give case for the RBA to start the next phase of tightening.

According to Mr Oster, the RBA should not raise the cash rate drastically next year; instead it should peak around 5.5 per cent in December 2011.

This would take the average standard variable rate (SVR) to around 8.5 per cent. At present, the average SVR of the majors is 7.7 per cent.

While it would appear that a reprieve from rate hikes looks likely in the immediate future, it is well worth reviewing your current mortgage to ensure it’s still the right one for you.

With a solid understanding of your current position you can look to capitalise on the months ahead when rates look set to stabilise, which may include driving your mortgage down or alternatively freeing up equity to purchase an investment property. Please feel free to give us a call and we’ll talk through your options.