Early signs of slowdown give hope of interest rate relief

Posted on 25/03/2008  
The economy slowing, confidence waning, car sales falling, property indicators declining - there are growing signs things are tightening in response to interest rate rises and sharemarket reversals.

The evidence at this point is inconclusive but if the instances of negative data continue to accumulate, there can be some confidence the Reserve Bank of Australia will leave interest rates alone for a while.

This month's increase to the official cash interest rate was the second this year and brings the rate to its highest level in 12 years, at 7.25%. The situation is even worse in real terms because lenders have been adding a margin to their rate rises in response to the RBA measures.

Some pundits believe we're starting to see consequences in real estate events. One research company claims property values fell in February. Others have pointed to falling auction clearance rates and a decline in the number of property sales recently. Personally, I think people are getting over-excited about shallow data, sometimes for no better reason than to generate publicity for themselves.

Nevertheless, there are the beginnings of a trend. Residex claims that median house prices fell in most capital cities in February. Clearance rates have been declining in the major cities this month (and the Real Estate Institute of Victoria says Melbourne success rates have been falling slowly but steadily since October). House sales volumes apparently are falling. The RBA itself sees evidence that the housing market has weakened, at the upper end as well as in the mortgage belt areas. We're now hearing about "affluent stress" alongside "mortgage stress".

The Westpac-Melbourne Institute Leading Index of Economic Activity, released in mid-March, found a significant fall in the annualized growth rate. The Australian Financial Review reported: "Westpac chief economist Bill Evans said the figures implied the RBA was now at the end of its current tightening cycle."

There are various signs of declining confidence among business people and consumers. The Australian Chamber of Commerce industrial trends survey shows the confidence index failing to its lowest level in 15 months. Car sales fell 2.3% in February. The daily newspaper on the Sunshine Coast in Queensland carried a recent headline which screamed "Property market to plunge by up to 30%", a rather hysterical interpretation of one agent's depressed assessment (and highly unlikely to come true) but perhaps reflective of the public mood.

As the Australian Financial Review wrote on 20 March: "It's not proof positive that the RBA has done enough, but it's another bit of evidence that price pressures are easing."


« Back