Business slams rate rise, but there are more on the way

Business groups have strongly criticised the Reserve Bank’s decision to increase the official cash rate by 25 basis points to 3.25%, saying Australia’s economic recovery remains fragile.

But their complaints are likely to fall on deaf ears, with most economists tipping the RBA will lift rates again in early November.

RBA Governor Glenn Stevens seized on a slew of positive economic data to justify the rate rise, saying economic growth was likely to return to normal far quicker than expected.

“With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy.”

But while business and consumer confidence has soared in recent months, business groups argue actual trading conditions remain very fragile.

“Many businesses will not be convinced of the need for a rate rise,” Australian Industry Group chief executive Heather Ridout says. “Across the manufacturing, services and construction sectors, a solid recovery remains some way off, with sales flat and the outlook tenuous.”

Australian Retailers Association executive director Russell Zimmerman accused the RBA of forgetting the past, saying retailers warned the RBA against raising interest rates in early 2008, when one too many rises caused consumer demand to fall for the next 12 months.

“For most of this year, retail recovery has been quite patchy. There was increased monthly trade in January, March, April, May and now August, but decreases in February, June and July,” Zimmerman says.

“Retailers would’ve liked to have seen a few more months of solid trade growth before any interest rate rises and they will definitely not welcome any interest rate hikes in the lead up to Christmas.”

“Usually changes to interest rates take between three to six months to impact the retail market. So, the damage from today’s decision could hit retailers just in time for Christmas.”

The Housing Industry Association chief economist Harley Dale described the rise as a “big risk”.

“Although there are some encouraging signs the economy has avoided falling off a cliff, it is still far too early to call an economic recovery. It was not that long ago we were told that Australia faced the worst economic conditions since the Great Depression. Either that assessment was a dramatic overstatement or the Reserve Bank has miscalculated.”

Despite these concerns, economists believe households should be able to weather this rate rise fairly comfortably, with the average monthly repayment on a $300,000 home loan set to increase by about $45.69 a month.

CommSec chief economist Craig James says Commonwealth Bank research shows more than 90% of its home loan customers are actually ahead in their loan repayments, as they chose to maintain mortgage repayment levels when rates were cut dramatically last year.

“The main burden of the rate hike will hit those that have purchased or built homes relatively recently,” James says. “And the higher loan repayments will certainly be factored in by budding home buyers in coming months.”

However, one crucial thing the RBA will need to watch is the impact of rising rates on the Australian dollar, which is hovering just under US89c following the rates decision. The higher dollar will hurt the prospects of recovery for export-focused sectors, such as the manufacturing industry.

“The high exchange rate is acting as a further brake on growth in both import competing and export oriented industries,” AIG’s Heather Ridout says.

Most economist are tipping at least one more rate rise before the end of 2009, with Craig James expecting the RBA to move up again at its next meting on November 2, while JP Morgan economist Stephen Walters expects a move in December.

Either way, households and businesses need to brace for rates to keep heading up over the next six months.