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20 January 2010

SMH: Consumers shrug off rate rises

An interest rate rise in February is looking more likely as consumers shrug off recent rate increases.

The news comes as Prime Minister Kevin Rudd warns voters to expect spending cuts as the labour market continues to mend.

But Australians appear to be unperturbed about rate rises in October, November and December, the Westpac-Melbourne Institute survey showed.

The monthly barometer of consumer sentiment jumped 5.6 per cent in January, with respondents even sunnier when asked about their economic expectations for 2010.

On the downside, the experts are warning home borrowers to expect a rate rise in February, when the Reserve Bank returns from holidays.

"The bank will be keen to move monetary settings back to a level where interest rates are no longer stimulatory for the economy," Westpac chief economist Bill Evans said, adding rates could rise another two times before June.

The prime minister was also urging consumers to expect some pain as he foreshadowed budget cuts.

"It is crucial that as a nation, we sustain fiscal discipline as we confront the long-term challenge of an ageing population," he said on Tuesday night.

"Some of the steps we must take to ensure fiscal sustainability will not be popular, but they will pay dividends over the longer term."

The coalition's finance spokesman Barnaby Joyce was sceptical about Mr Rudd's pledge to rein in spending.

"It's like the town drunk saying after one of the biggest binges in the history of the alley, 'I'm now going to revert back to the temperance league'," Senator Joyce told ABC Radio.

Responding to the charge, Treasurer Wayne Swan reiterated that Labor planned to cap spending and return the budget to surplus.

As Labor defends its stimulus package, the labour market continues to recover.

The government's skilled vacancies index rose by 1.1 per cent in January, the seventh successive monthly increase.

Westpac's Mr Evans believes unemployment has peaked at 5.5 per cent.

In another sign of an economic comeback, official residential building and home renovations data improved in the September quarter.

But the official figures were taken before the recent run of rate rises.

The government's first home buyer grant has since been scaled back to $7,000.

While the news is good, Housing Industry Association chief economist Harley Dale is worried about the effect rate rises could have on the construction sector.

"It remains unclear whether the recovery can gather legs beyond this year," he said.

The Reserve Bank is due to meet again on February 2, with most economists expecting the 3.75 per cent cash rate to rise again.

Source: Sydney Morning Herald

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