Rates pressure builds

Economists will be devouring this morning’s inflation figures in detail over the next few days, but the quick take is that the upwards pressure on interest rates is increasing.

Headline inflation was bang on economists’ forecasts at 1.2%, although this wasn’t as bad as it looks – prices during the March quarter were always going to be forced by Australia’s run of natural disasters and the RBA has made it clear that it is willing to look past this when it considers interest rate decisions.

However, the “core” inflation reading which the RBA relies most on was a touch higher than most economists had expected, suggesting inflationary pressures are on the rise again.

Most economists were expecting one or two 25-basis-point interest rate rises in the second half of 2011 – that looks to be very likely based on today’s data.

The spectre of interest rate rises is not what consumers – or the businesses trying to sell to them – need right now.

The latest Fujitsu/JP Morgan Mortgage Industry Report, released this morning, shows that concerns about higher interest rates and rising living costs have replaced the GFC and job security concerns as the biggest drivers of mortgage stress.

The report warns that Australia’s banks are going to need to get used to a period of constrained lending growth, with lower house price growth, slower housing construction growth and affordability concerns (read interest rates) all weighing on demand for mortgages.

As we’ve said before, this slowdown in the mortgage market should have a nice knock-on benefit for businesses, in that banks will need to compete harder for SME lending.

However, the broader trend – consumers feeling continued pressure from interest rates – is one that will hit many sectors, and not just banking and retail.

Until consumers feel “safe” enough to stop saving and paying down debt and start spending again, conditions will remain very patchy for many SMEs.

Spotting the sub-sectors, niches and customers that are least affected by the consumer caution will be crucial – hopefully your strategy and sales team are doing plenty of market research and gathering as much intelligence as possible.

This knowledge is going to remain crucial in the coming months and perhaps even the next few years.