The RBA should not hike rates in October - how much can a household bear?

Punditry is an interesting art form insofar as the question of whether the pundit is saying what s/he thinks or simply saying what they think will be well received. So it is with economic pundits and their call for RBA moves next week. We have read at least one prominent economist who clearly doesn’t believe the RBA should increase but thinks they will so that’s their call. In a sense they are trying to be right on “both hands”. That’s fair enough, it’s what keeps them employed in the long run probably, safety of the pack is better than being caught one out trying to defend a position.

We are in the camp that says the RBA should not hike next week. We know they have held a bias to tighten for some time and have spruiked it in this piece often but we truly doubt that Households need another reminder of the impact of interest rates to remain circumspect.

Source: ABS, Spotlight
Look at the chart. Does this look like a housing bubble. Would Minsky think this was Ponzi? We doubt it. Yes Australian house prices have risen and yes Australian debt levels are high but the household sector is circumspect not ebullient. That's for markets.

It is quite clear that the recent commentary from the RBA on the outlook for Australia and the positive impacts that we are expected to encounter from the 2 leg of the mining boom is driving the rationale behind the call for rate hikes. We also understand, and the RBA has made quite clear, that is the Household sectors that must be contained in order to make room for the mining boom so as not to create capacity constraints which would fuel inflation. But how much can Households bear?

The Housing Industry Association released their new home sales figures for August yesterday showing a fall of 2.6% which was a fourth straight monthly decline. Sales have now fallen 18% since their recent peak in January and are down over 20% since the same time last year. Housing finance has followed a similar path with approvals for owner occupiers contracting at an annual pace of 20% over the past few months while approvals for investors are also pulling back sharply. We have talked about the natural handbrake on activity that is the AUD heading toward parity and we believe the global backdrop still fragile.

So with Household already feeling the pinch and the AUD on the up the RBA may have a little more time up its sleeve to resume the tightening cycle