Australian interest rates: retail sales figures boost rate rise fears

6th November 2007
By Petter Ingemarsson

Strong retail sales figures make an expected rate rise in November almost inevitable.

Higher than expected September retail sales figures have led economists to conclude that Australian interest rates will rise again in November. Indeed, the Reserve Bank of Australia is expected to raise the cash rate to 6.75% when it next convenes. This will no doubt further worsen tight Australian housing conditions, as well as place further pressure on struggling mortgage holders.

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Australian retail sales rose by 0.8% in September 2007, according to the Australian Bureau of Statistics. Economists had forecast retail sales to rise by 0.5%. This corresponds to seasonally adjusted retail sales of A$9.86 billion, up from A$19.67 billion in August 2007. Looking at the September quarter, retail sales rose to A$56.66 billion, from A$55.58 billion in the previous quarter. This corresponds to a 1.9% rise in sales.

At the same time, other economic indicators have also been strong, with record low unemployment rates and rising incomes, putting inflationary pressure on the economy. The latest inflation figures show that underlying inflation in the last quarter reached 0.9%. Spending seems to have been unaffected by the previous rate rise in August, when the Reserve Bank raised the cash rate by 25 basis points to 6.5%. Some economists now predict two rate rises before the end of the year.

Rising interest rates will continue to hurt Australian mortgage holders, and a recent pick-up in property price growth will exacerbate affordability issues for prospective first-time buyers. The Australian housing market is already tight. Affordability is at an all-time low and new housing approvals lag behind housing needs. The forecasted interest rate rises will add further pressure on the Australian market, which is already suffering from record levels of housing stress.

Housing affordability and interest rates look set to become one of the most contentious issues of the upcoming federal election. Housing affordability is both a deeply personal matter and an economic issue. Politicians can influence voters both by using economic statistics and by pulling at heartstrings, ensuring that a wide range of political strategies will be used in the run-up to the election.
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