Entrepreneurs must brace for more rate rises

Reserve Bank Governor Glenn Stevens may have said that rates are now at “average” levels for borrowers, but economists are warning that business owners and mortgagees must be prepared for at least three more rate rises in 2010 and further rises as 2011 as the RBA fights to keep inflation in check.

Stevens painted a rosy picture of the economy yesterday, indicating strong growth in the mining sector was underpinning a faster-than-expected recovery.

And while anecdotal evidence suggests many SMEs are still battling to obtain credit for growth, Stevens also delivered an upbeat assessment of the business lending market.

“The process of business sector deleveraging is moderating, with business credit stabilising and indications that lenders are starting to become more willing to lend to some borrowers, though credit conditions for some sectors remain difficult.”

However, the latest rate rise will only add to business borrowing costs – and there is more pain on the way.

While most economists are expecting the RBA will take a break from rate rises for June and possibly July, most are tipping further rises later in the year, starting in August.

ANZ chief economist Warren Hogan argues that strong house price growth, higher consumer confidence and rising credit growth all indicate interest rates are still low enough to be stimulating the economy.

This is adding to inflationary pressures which were already in evident in last week’s Consumer Price Index data and Hogan argues the RBA will want to launch a pre-emptive strike to ensure inflation doesn’t get out of control.

“The RBA can’t afford to let inflation get away from them at present. High and rising house prices and household debt combine with a pre-dominance of floating rate mortgages to make Australia particularly susceptible to an inflation/interest rate surge. The RBA needs to move early to limit the ultimate extent to which rates will need to rise.

“Unless we see a fundamental shift in direction for China and commodity markets, the RBA will need to keep lifting rates. We expect two further rate increases in the third quarter. This will get the cash rate to 5% by September and 5.25% by the end of the year.”

Looking out into 2011, the cash rate is tipped to keep climbing as inflationary pressures keep building, with up to five quarter-of-percent rises possible.

JP Morgan chief economist is tipping the cash rate will reach 6.25% by the end of 2011, while Royal Bank of Scotland is predicting the cash rate could get as high as 6.5%.

ANZ’s Warren Hogan is a little more conservative.

“Rates will likely need to be restrictive later this year or early next year if the commodity boom plays out in a similar fashion to last time and is sustained. We expect the cash rate to peak at 6% in 2011.”

But while many commentators see rates being used as a way to blunt the impact of the second coming of the mining boom, businesses in other sectors appear to be already feeling the pain.

The retail sector, which is already experiencing patchy spending conditions as the impact of last year’s Government stimulus measures fades, was unsurprisingly angry with yesterday’s rise, with the Australian Retailers’ Association arguing the RBA needs to wait and see how its previous rate hikes are affecting the economy.

“The RBA is continuously ignoring pleas from retailers to let rate hikes impact the market fully before they rush like a bull at a gate bombarding consumers with rate rise after rate rise,” deputy executive director Jennifer Cromarty says.

“Consumers need time to properly manage increases to their mortgages without pulling back so much on their spending.”

Westpac chief economist Bill Evans has long flagged a variable mortgage rate of 8% as the level at which consumer confidence will fall sharply. With rates now at 7.4% after yesterday’s jump, it appears almost certain that mortgage rates will hit this trigger point by the end of the year, putting a further dampener on spending across the economy.

Commentators are also trying to pick when rising rates will hit mortgagees, particularly those first home buyers who have bought into the market at high prices over the past 12 to 18 months.

The latest mortgage stress report from Fujitsu Australia showed first home owners are committing 34% of their post-tax income toward servicing the mortgage; this will rise to 42% when the variable mortgage rate hits 7.7%.

That could leave first home buyers particularly vulnerable in 2011 if rates do keep escalating.

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