Damage control

What are the most beautiful words in the English language for anyone with a variable rate home loan? That's simple and they're even more enjoyable to hear when an interest rate expert utters them.

Those words are: "The next interest rate move might be down."

Is the worst over?

Yes, the economist fraternity, who were all giving the Reserve Bank the thumbs up and applause for raising interest rates from November, in particular, are starting to believe the damage has been done.

And that's what the Reserve Bank actually wanted. In a way, it's like the latest Daniel Day Lewis movie: There Will Be Blood.

Stemming the flow

That's what this interest rate torture is about. You see, when unemployment is at a 33-year low and less than 4%, interest rate rises are used to slow down the economy to create unemployment.

Of course, slowing down an economy or reducing demand sounds so academic, but the reality is that the Big Bank raised rates to kill jobs, hurt businesses and stop the buying of houses, air conditioning units and new cars.

Easing off the pace

In his latest economic newsletter, Macquarie Bank's interest rate strategist, Rory Robertson, simply summed up his new take on the Reserve Bank and the economy. On the Tuesday decision on rates, he was adamant.

"The cash rate will be left unchanged at its decade-plus high of 7.25%," he wrote. "Furthermore, with mortgage rates near 9%, growing signs of softer household demand, our major banks threatening 'credit rationing' and the Fed recently doing extraordinary things to keep the US economy and financial system afloat, another RBA hike in May is highly unlikely."

What goes up...

And after saying that, he wrote the following beautiful words:

"Indeed, as highlighted here in recent weeks, the RBA's next move in rates could easily be down, though probably not soon."

Handle with care

This comes when Robertson ran a spirited defence of the Reserve Bank against former academic, economist and leader of the opposition, Dr John Hewson. "Preferring inflation fights this century to be painless, Dr Hewson argued - as he did late in 2006 - that the RBA already has hiked rates 'too far'," Robertson explained.

Hewson actually argued: "It wouldn't take too much more of the mismanagement by the RBA and the government" for the Australian economy to follow the US economy into recession.

Time will tell

Robertson thinks the Reserve Bank has got it right and Hewson is operating off old economics. That's a debate for another time, the good news is that we may have endured enough pain to beat the inflation dragon.

On the horizon

One big economic revelation to look out for is on 23 April. On this day we get the next inflation number, which Robertson thinks could still be on the high side, yet he still thinks rates could be on hold.

"Importantly, Governor Stevens already has observed that policy in 2008 is 'grappling with a peak CPI inflation rate that looks like it will be around 4% in CPI terms, and trying to assess how soon it can reasonably return to 2-3%'," he wrote.

Sense and sensibility

He believes the Reserve Bank always is able to make judgments, to choose a sensible response to incoming news on activity, inflation and financial stability. He doesn't think the Big Bank is on 'automatic pilot', forced to respond to incoming inflation news in a particular way.

Grinding to a halt

Robertson thinks the Reserve Bank expects a biggish inflation number and only a shock big one would spook them to raise again soon, if at all.

He sees demand heading in the right direction for a rate cut. Decelerating retail spending continues to emerge. "Gerry Harvey kicked-off the 'slowing sales growth' tune a couple of weeks ago and David Jones and Myer last week both joined the chorus," Robertson said.

Sudden impact

The killer comment came from Myer chief executive Bernie Brookes.

"It's as if there has been some sort of tap turned off," he says. "It has happened reasonably quickly.

"Normally you would see people trading down into cheaper brands but none of that has occurred - it's just been everything."

Friday brings the official retail view and it should make interesting reading.

Home on the range

On the home sales front, clearance rates last weekend fell to 48% for Sydney, 40% for Melbourne, 31% for Brisbane, and 44% for Adelaide, according to Australian Property Monitors.

Volumes were particularly low as a result of the recent early-Easter interruption, but it's notable that clearance rates now have fallen significantly in the three markets (Melbourne, Adelaide and Brisbane) where prices increased by 20% or so over 2007.

Clearance rates were closer to 60% a few months ago.

Market volatility

Then throw in a 16% fall in the stock market and that is bound to have carry through impacts on consumption for the vast number of middle- and upper-income types who play the market.

Local chartists show there is upside ahead for Aussie shares, but we will need the news coming out of America to get progressively better.

On the up

The second half of 2008 will see the US economy improve and that's when US share prices should move up noticeably. We have a while to wait before we can rid ourselves of the jitters, but the signs are slowly improving. We are not yet out of the woods.

Beyond expectations

My most important hope is that the Reserve Bank has not gone too far with these interest rate rises. As I see the margin loan mess with Tricom and Opes Prime, it seems the knock on effects of the sub-prime problems have been bigger than anyone, and I mean anyone, ever expected.

Click here to visit Peter Switzer's website

Damage control

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