RBA warns Australians to prepare for higher interest rates
UPDATE: Scott Murdoch | August 14, 2009
Article from: The Australian
RESERVE Bank governor Glenn Stevens warned Australian homeowners and home buyers today to prepare for higher interest rates from the current "emergency" lows, as the economy starts to strengthen.
The central bank chief said the global economy was starting to improve, but there were still potential risks which could damage the recovery both in Australia and offshore.
Delivering his semi-annual testimony to a parliamentary economics committee, Mr Stevens said the downturn in the Australian economy was likely to be one of the least severe in recent history.
"This may well turn out to be one of the shallower downturns Australia has experienced," he said.
His comments propelled the Australian dollar to an 11-month high of US84.77 cents and helped fuel a stockmarket rally, with the benchmark S&P/ASX 200 index rising as much as 1.7 per cent to a 10-month intraday peak in early trading.
To listen to Mr Stevens in a webcast, click on testimony
Mr Stevens said interest rates had been slashed by 425 basis points since September last year to “emergency'” levels -- a 49-year-low of 3 per cent -- to help the protect the economy from the worst of the global downturn after the collapse of US investment bank Lehman Brothers.
However, Mr Stevens flagged interest rate rises could soon start to rise and warned new home buyers to factor in that interest rates would not remain so low for long.
“I think people should keep in mind that interest rates will be higher, at least for the variable rate loans,” Mr Stevens said. “Fixed rates have already started going up (and) the yield curve is bidding some of these increases.
“I don't offer financial advice to people, but it would be prudent to be confident that you can absorb increases in interest rates when you're taking out a loan.”
The financial markets are growing increasingly confident the RBA will begin raising interest rates before December, with up to six hikes expected by August next year.
Mr Stevens did not dismiss the idea that interest rates would be raised before the end of the year and said the "normal" level of official rates was significantly higher than the current 3 per cent.
He also said that the average cash rate in the past was in "the fives" -- that is, between 5 per cent and 6 per cent.
"What we have at the moment is an emergency setting," Mr Stevens said. "Extraordinary measures were taken, but when the emergency has passed, you have got to think about withdrawing emergency measures over time."
"At some point you are going to have to make a response to move away from the emergency setting."
Mr Stevens said the government's fiscal stimulus payments, worth nearly $60 billion, had worked its way through the financial system and the broader economy.
A survey by Westpac earlier this week found that almost one-third of the direct payments to households had been saved, and not spent by conservative consumers.
Mr Stevens said: “It's clear that the cash transfers would have had some impact on retail sales ... and it's clear that the first home buyers until recently have been very prominent in the pick up of demand in finance.
“But I think the first home buyers have started to tail off.”
JPMorgan chief economist Stephen Walters said while the RBA had changed its stance on interest rates from an easing to neutral bias, it did not mean a rate hike was certain in the near future.
“It is, however, an important step towards the RBA withdrawing policy stimulus throughout 2010,” he said.
“We expect the first 25 basis point rate hike to come in February, on the basis that officials need the intervening period to assess how the ‘considerable’ uncertainties that remain are resolving themselves.
“We also anticipate a softening of the data in coming months. Only if the data stays firm, without new stimulus and as energy prices rise, will the timing of the first rate hike be dragged forward into late 2009.”
UPDATE: Scott Murdoch | August 14, 2009
Article from: The Australian
RESERVE Bank governor Glenn Stevens warned Australian homeowners and home buyers today to prepare for higher interest rates from the current "emergency" lows, as the economy starts to strengthen.
The central bank chief said the global economy was starting to improve, but there were still potential risks which could damage the recovery both in Australia and offshore.
Delivering his semi-annual testimony to a parliamentary economics committee, Mr Stevens said the downturn in the Australian economy was likely to be one of the least severe in recent history.
"This may well turn out to be one of the shallower downturns Australia has experienced," he said.
His comments propelled the Australian dollar to an 11-month high of US84.77 cents and helped fuel a stockmarket rally, with the benchmark S&P/ASX 200 index rising as much as 1.7 per cent to a 10-month intraday peak in early trading.
To listen to Mr Stevens in a webcast, click on testimony
Mr Stevens said interest rates had been slashed by 425 basis points since September last year to “emergency'” levels -- a 49-year-low of 3 per cent -- to help the protect the economy from the worst of the global downturn after the collapse of US investment bank Lehman Brothers.
However, Mr Stevens flagged interest rate rises could soon start to rise and warned new home buyers to factor in that interest rates would not remain so low for long.
“I think people should keep in mind that interest rates will be higher, at least for the variable rate loans,” Mr Stevens said. “Fixed rates have already started going up (and) the yield curve is bidding some of these increases.
“I don't offer financial advice to people, but it would be prudent to be confident that you can absorb increases in interest rates when you're taking out a loan.”
The financial markets are growing increasingly confident the RBA will begin raising interest rates before December, with up to six hikes expected by August next year.
Mr Stevens did not dismiss the idea that interest rates would be raised before the end of the year and said the "normal" level of official rates was significantly higher than the current 3 per cent.
He also said that the average cash rate in the past was in "the fives" -- that is, between 5 per cent and 6 per cent.
"What we have at the moment is an emergency setting," Mr Stevens said. "Extraordinary measures were taken, but when the emergency has passed, you have got to think about withdrawing emergency measures over time."
"At some point you are going to have to make a response to move away from the emergency setting."
Mr Stevens said the government's fiscal stimulus payments, worth nearly $60 billion, had worked its way through the financial system and the broader economy.
A survey by Westpac earlier this week found that almost one-third of the direct payments to households had been saved, and not spent by conservative consumers.
Mr Stevens said: “It's clear that the cash transfers would have had some impact on retail sales ... and it's clear that the first home buyers until recently have been very prominent in the pick up of demand in finance.
“But I think the first home buyers have started to tail off.”
JPMorgan chief economist Stephen Walters said while the RBA had changed its stance on interest rates from an easing to neutral bias, it did not mean a rate hike was certain in the near future.
“It is, however, an important step towards the RBA withdrawing policy stimulus throughout 2010,” he said.
“We expect the first 25 basis point rate hike to come in February, on the basis that officials need the intervening period to assess how the ‘considerable’ uncertainties that remain are resolving themselves.
“We also anticipate a softening of the data in coming months. Only if the data stays firm, without new stimulus and as energy prices rise, will the timing of the first rate hike be dragged forward into late 2009.”