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Australia consumers less cheery as rates rise

SYDNEY: A key measure of Australian consumer confidence slipped for a second month in December as rising interest rates soured sentiment for those with mortgages, even as the broad mood on the economy remained upbeat. The survey of 1,200 people by Westpac Bank and the Melbourne Institute released on Dec 9 showed its index of consumer sentiment dipped 3.8% to 113.8 in December.

But that was still 23.7% higher than a year ago and well above its long run average of 101.3.

"This is a surprisingly modest fall in the index given recent developments on interest rates," said Westpac's chief economist, Bill Evans. "The evidence is that households overall are coping relatively well with the rate increases to date."

The Reserve Bank of Australia (RBA) last week lifted its cash rate by 25 basis points to 3.75%, the third hike in as many months.

The standard variable mortgage rate had now climbed to between 6.5% and 6.75%, compared to around 5.75% as recently as September. Over that period the overall confidence index had fallen by 4.7% from near record highs.

Still, the pressure on highly indebted households was starting to show in December as confidence amongst those with a mortgage fell by a steep 8.9%.

On Dec 8, RBA Governor Glenn Stevens said the central bank would take the outsized increase in mortgage rates into account when setting monetary policy. He also noted that proposed rules to ensure banks have more capital would also likely lift bank funding costs and so costs for borrowers.

That might mean the neutral cash rate, or one that neither retards nor stimulates growth, was lower than in the past. Analysts have typically seen neutral as being 5% to 6%.

Yet Stevens also saw reasons why neutral may be higher given accelerating economic growth and a fast-growing population, leaving his ultimate target for rates open.

Investors are pricing in rates of around 4.75% by the end of next year, but much depends on how the economy develops.

One area of strength is proving to be housing, with approvals to build a new home up sharply in recent months.

Government figures on Dec 9 showed loans for home construction jumped 9.2% in October, to be up no less than 103% on the same month last year.

Overall, the number of mortgages dipped 1.4% in October, from September, but were still up 26% on October last year.

"The level of lending for new construction is making new cycle highs, now at its highest since the 2002/03 cycle and consistent with at least a further 30% rise in building approvals," said George Tharenou, an economist at UBS.

Less encouraging was a widening in Australia's trade deficit in October to A$2.38 billion (RM7.31 billion), the biggest shortfall in 19 months.

Exports dropped 3.5%, in part due to a 12% fall in coal earnings and a 7% decline in metals like iron ore.

Imports eased a relatively modest 0.8%, mostly due to a drop in oil, while imports of capital goods actually rose 1% as Australian firms continued to invest.

Indeed, a host of major resource projects are underway or on the planning boards and much of the heavy machinery required will have to be imported.

All this investment will eventually produce a significant increase in exports, particularly for liquified natural gas, but in the meantime a wider trade deficit could become the norm. -- Reuters

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