Growth is slowing across the property market and rentals are again on the rise. Although the Reserve Bank of Australia (RBA) announced interest rates will remain on hold at 4.75 per cent at its last board meeting, there is speculation that a rate rise is coming. However, Residex CEO John Edwards is of a different opinion.
Petrol Prices vs Cash Rate
Growth is slowing across the property market and rentals are again on the rise. Although the Reserve Bank of Australia (RBA) announced interest rates will remain on hold at 4.75 per cent at its last board meeting, there is speculation that a rate rise is coming. However, Residex CEO John Edwards is of a different opinion.
“There has been a lot of comment about an expected increase in interest rates toward the end of the year; however I am not so sure. I predict that the next interest rate movement will not be a small increase but a small movement down, which is something I have pointed to previously and I am becoming more confident in the prediction as time passes”, said Mr. Edwards.
There can be little doubt that previous interest rate increases implemented by the RBA have taken its toll on housing purchase activity, and the retail market generally. Further, it has reminded borrowers that certainty in the future is limited and there continues to be caution in spending and borrowing, and a higher rate of saving out of current income.
It is for this reason we should be so interested in the intentions of the RBA, and recognise the impact of rising petrol prices.
It is important to remember that there is a significant multiplier impact from increasing oil costs - Not only does weekly spend increase as cars get fueled, all goods and perishables increase in price as freight costs rise.
Mr. Edwards said, “Increasing fuel costs are a better moderator of household spending than interest rates because increasing fuel costs impact on all of our community, not just borrowers.
On my calculations, the RBA has no need to increase interest rates for a number of reasons, but principally, increases at the fuel pump have solved its problem and is perhaps in over kill mode.”
Weak ‘retail household goods spending’ and ‘cafes, restaurants and takeaway food services’ trend figures (-0.3% and -0.5% respectively) support the view that households are finding things more difficult. Additionally, it is clear the construction and resale home market is also weak.
The last RBA interest rate increase was a 25 basis point increase in November 2010. Since then, petrol prices have increased by more than $0.25 per litre.
“On my calculation, a rise of $0.39 per litre is the same in dollar cost per week as a 0.25 per cent increase in interest rates on a $300,000 mortgage. Remember, my calculation does not take into account flow on impacts of fuel costs either. We have also been shielded from the full impact of rising oil costs by our strong dollar,” Mr. Edwards said.
In the graph ‘Petrol Prices vs. Cash Rate’, Mr. Edwards has compared RBA cash rates to petrol prices.
The strong growth in fuel prices is clearly evident. A continuation of the increasing fuel costs and any decrease in the value of the Australian dollar should quickly cause the RBA to move rates down to avoid moving a large portion of the economy into recessionary behaviour.
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May 2011
