Australian confidence up - but only a bit: AMP Capital's Shane Oliver
Consumer confidence rose 4% in October. This followed a similar bounce in the NAB business survey’s measure of confidence (from +1 to +5).
While the change in Prime Minister has provided a boost to confidence it has been pretty modest, leaving overall confidence pretty subdued.
The move by a major bank to increase its mortgage rates next month by 0.2% - for both owner occupiers and investors – is not particularly surprising as it flows from the rise in the cost of funding that will flow from higher capital requirements being imposed on the banks. Other banks may follow.
With growth stuck around 2% and the mining investment downturn only about half way through, the last thing the economy needs now is a rate hike for the 30-40% of households who have a mortgage given the threat it will pose to consumer spending.
The best way to avoid this is for the RBA to cut the official cash rate in order to offset the higher funding costs the banks now face. This may mean that there is only around a 0.05% pass through to mortgage holders from the banks (depending on what other banks choose to do) but it’s still better than a rate hike.
The case for the RBA to cut rates further was already in place – growth at 2% is well below trend, the contribution to growth from housing looks like topping out next year at a time when we are still only half way through the mining investment downturn, housing investor lending looks to be slowing as is the Sydney property market, inflation is benign and the $A is still too high. The bank move to raise mortgage rates for all borrowers only adds to it.
A November (Melbourne Cup Day) rate cut is looking more likely. If not then, then early next year.
SHANE OLIVER is head of investment strategy and economics and chief economist at AMP Capital and is responsible for AMP Capital's diversified investment funds.