RATE HIKES ON THE WAY SAYS WESTPAC ECONOMIST

Written on the 4 April 2011

RATE HIKES ON THE WAY SAYS WESTPAC ECONOMIST

AS the Reserve Bank of Australia (RBA) remains focused on the mining boom, Westpac Bank’s chief economist Bill Evans says only drastic job losses would stop interest rate ‘pain’ this year.

Speaking at a Real Estate Institute of Queensland (REIQ) event today, Evans highlighted a cautious consumer market, ‘pessimistic’ public outlook on the economy and restrained spending as keeping inflation under control.

However with a low unemployment rate and the resources sector continuing to boom, he says the RBA is certain to hike rates in the second half of this year.

“If those inflation numbers remain under control, then it’s going to be really hard for the Reserve Bank to raise rates (but) the other thing we look for on rates is the labour market, and that’s where the problem is,” says Evans, Westpac’s managing director and global head of economics and research.

“The unemployment rate is at 5 per cent and they (the RBA) consider that to be full employment. If we start to see labour market numbers printing unemployment below 5 per cent, the market is going to go haywire.

“The thing that really surprises me is why some of these sectors that are doing it so tough at the moment aren’t slashing jobs. I’m telling you the job correction isn’t coming. When I talk to my customers in retail I say ‘why aren’t you slashing jobs?’

“In the last three months, we’ve actually had minus 2000 jobs and that’s a good sign. It takes some pressure off the interest rates story. But the lead indicators we use suggest this is going to be surging again in the second half.

“Now I don’t know where they come from, but if you ask the RBA they’ll look at you with a straight face and say it’s coming from mining. I don’t believe that story.”

Housing prices across the country may be falling, but Evans says the Australian housing market is still the most unaffordable in the world.

He predicts any rate rises will further tighten spending among a conservative consumer market and the declining interest in property should see rates begin to fall again by 2013-14.

“Consumers are very conservative, very cautious and they’re not going to want to get involved in that market while the spectre of interest rates is to rise,” he says.

“We need to see interest rates coming down and unfortunately for that to happen, there’s going to have to be some further pain in the meantime. And we hope desperately that the prosperity of the mining boom will begin to trickle down to the rest of us.

“I just can’t get over the fact that the central bank is so much focused on creating space for the mining boom, that they will want to raise interest rates for this year.”

Evans says Australia’s economic position is recognised as one of the best in the world, but despite $70 billion of approved resources projects, Queensland is the poorest performing state.


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