Rates rise – but will consumers stop spending?

The need to combat “significant inflation pressures” has caused the Reserve Bank of Australia to lift the official cash interest rate 0.25% to 7%, its highest level in more than a decade.

Combined with recent rate increases implemented by the banks in response to the international credit squeeze, the rise means many home owners will now face a variable mortgage interest rate of well above 8.5%.

And, in a statement accompanying the rate rise decision, Reserve Bank Governor Glenn Stevens indicated there could be further rises to come.

“Given the extent of pressure on capacity and the build-up in inflation, a significant slowing in demand from its recent pace is likely to be necessary to reduce inflation over time,” Stevens says. “In future meetings, the board will continue to evaluate whether the stance of policy will be sufficiently restrictive to return inflation to the 2% to 3% target.”

Stevens says the recent squeeze on international credit markets is likely to produce some moderating in demand in the coming months, a factor the RBA took into account in making its decision.

But last month’s bigger than expected CPI figure, high levels of capacity utilisation, labour shortages and several sets of data showing continuing high levels of consumer demand meant an additional rate rise was required.

Retail analysts and economists believe that the rate rise is only likely to produce a short term tightening in consumer purse strings.

Greg Evans, the director of economics and industry policy with the Australian Chamber of Commerce and Industry, says strong retail demand is likely to continue.

“The underlying strength in the economy – we believe it’s growing at over 4% – will continue to push demand along, but we do have to implement measures to control inflation, and one of those is to adjust monetary policy,” Evans says.

But Australian Retail Association executive director Richard Evans says the RBA move will put SMEs in the retail sector under additional pressure.

“February brings the triple cash drains of Christmas credit card debt due, BAS statements to be filled and paid, and back-to-school costs. This rate rise will only put added pressure on familles with mortgages and small businesses,” Evans says

“With retailers just coming off the peak of trading demand, which happened to fall during the Christmas/Boxing Day period, they are now experiencing the cyclical downturn. For smaller retailers, this rate rise will be felt almost immediately in daily takings,” he says.