 Consumer feelings tested
Last week's rate rise was not a shock to most, and even the increasing rates are seen as positive for the economy. The Reserve Bank of Australia moved last week to raise the official cash rate 25 basis points up to 3.25% and most banks passed on the increase to mortgage holders.
The Westpac Melbourne Institute shows the consumer sentiment index leapt 1.7 per cent in October, to 121.4 points, the highest since June 2007. The improvement in consumer confidence has been growing for the past five months and was at 119.8 in September.
Westpac chief economist Bill Evans is not surprised by the results and said in a statement that the improvements were to be expected.
Mr Evans said consumer confidence would take a hit if interest rates surpassed 3.5 per cent. They are currently at 3.25 per cent. "Higher debt levels are likely to make households even more sensitive to increases in the standard variable rate."
Consumers were happy with small rate rises while interest rates are still relatively low, according to previous data. But should the rates rise considerably, conssumer sentiment could change.
Financial markets predict another rate rise from the Reserve Bank in November, followed by further small rises in to 2010. All of these increases are expected to be passed on by the banks to borrowers.
Unemployment figures are looking positive as data released for September showed the jobless rate fell from 5.8 per cent to 5.7 per cent.
Recent figures also show that Australian home owners have been careful with their debt in recent times. During the past 12 months or so, while interest rates have been at record lows, borrowers have been making extra repayments on their mortgages. According to the Australian Bureau of Statistics and the Reserve Bank, many home owners had been making additional payments and were ahead on their repayments, meaning they had built up savings in their home loan.
The relatively small increase of 25 basis points last week, amounts to around an extra $50 per month on an average $400,000 mortgage. These rates rises will be seen as reasonable for most, with it indicating the economy is looking better. However, as rates continue to climb, as they are expected to over the coming 12 months, home owners may find mortgage rates reaching difficult levels.
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