RBA May be Done, as Consumers Say, 'Enough'

CANBERRA—The chance of an interest rate cut is just a speck of light at the end of a long gloomy tunnel.

But at least for struggling homebuyers there is growing evidence that the Reserve Bank of Australia (RBA) may have done enough to cool future domestic demand with its recent series of rate rises, economists say.

Falling consumer and business confidence, and waning hiring intentions all point to a slowdown in domestic demand as the economy feels the weight of 12-year high interest rates - just what the RBA wants to cool inflationary pressures.

The biggest surprise for economists this week was another drop in the monthly Westpac-Melbourne Institute consumer sentiment index given that it had already shed more than 20 per cent in the first three months of the year.

While it eased by a more modest 1.3 per cent in April, some analysts had expected a modest rebound after the central bank left interest rates unchanged this month.

Confidence is now at its lowest level since June 1993.

"Rate hikes, falling share prices, rising housing costs and soaring petrol and food prices have got many people saying, `enough is enough'," Commonwealth Securities chief economist Craig James said.

Such fragility will flow through to retail spending, which has already seen declining growth in both January and February, and will make a substantial dent in gross domestic product (GDP) growth.

Consumer consumption makes up 60 per cent of domestic demand.

With the data currently available, Lehman Brothers chief economist Stephen Roberts calculates that March quarter GDP growth could just be 0.2 per cent in the quarter, which would rein back the annual figure to around 3.0 per cent from 3.9 per cent as of the December quarter.

However, Mr Roberts does not expect the economy will follow the United States into recession, although it may feel like it has.

He says that at some stage this year, annual growth in the domestic demand part of GDP will come back to below two per cent after being at a "highly elevated" 5.7 per cent in the year to December.

"You pull the best part of four percentage points out of final domestic demand and that feels like a recession, the change is huge," Mr Roberts said.

"It will feel like one, but statistically it won't be."

Technically, a recession is two consecutive quarters of negative GDP growth, an outcome not expected by RBA Governor Glenn Stevens.

Mr Stevens told federal parliament's economics committee last week that he did not expect a domestic recession "any time soon", provided the reserve bank can contain inflation.

"I think we will be able to, and if that turns out to be right, then we can sustain growth further into the future," Mr Stevens said.

There were signs in his semi-annual hearing that Mr Stevens is happy with how the economy is panning out, even though he does expect the consumer price index to spike to around 4.0 per cent in the March quarter.

This is way above the reserve bank's two to three per cent target.

But Mr Stevens expects the RBA will be able to downgrade its future forecasts for inflation when it releases its next quarterly policy statement in May after what he admits has been a "substantial" tightening in financial conditions since the middle of last year.

The RBA has raised its official cash rate four times since August last year, while retail banks have also made a series of increases to their lending rates beyond the central bank's moves.

This has seen mortgage rates increase by some 1.35 percentage points on average in the space of eight months.

Economists say it is difficult to forecast whether the commercial banks will need to raise their rates again.

Yesterday, AMP Banking lifted its mortgage rates for the third time in less than a month.

The banks have been passing on their own higher foreign borrowing costs, which is the result of the global credit crunch following last year's collapse of the US sub-prime mortgage market.

On the local wholesale interest rate market, rates are still over 0.6 percentage points above the 7.25 per cent official cash rate.

But economists are becoming slightly more confident that official interest rates will be on hold for sometime.

"As soon as (the RBA) have got some confidence that they are on top of the inflation problem and it is starting to recede, then they will start to bring the interest rate structure back from a plainly very tight position," Mr Roberts said.

"... There is no point killing the economy."

The March quarter CPI is released on April 23.