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Loan rates on hold as economy slows

HOME mortgage rates are probably as high as they are going to get because the economy's latest growth statistics have disappointed pundits.

The economy expanded 0.6 per cent in the March quarter, less than the 1 per cent the Reserve Bank was expecting and the 0.8 per cent predicted by economists.

This means the Reserve Bank is less likely to raise interest rates again and that the long-foreshadowed slowdown in the economy is closer to a reality. The economy has expanded for 19 consecutive quarters.

The central bank's cash rate influences all interest rates, including those in the home mortgage market.

Although the economy is still expanding, Westpac described the growth notched up in the March quarter as modest.

"Coming on top of a revised 3 per cent increase in the December quarter, growth is nothing short of underwhelming," it said.

The economy's annual growth rate has slipped from a peak of 5.8 per cent in June last year to 2.5 per cent in the March 2005 year.

"This business cycle is now clearly past its best-by date, with annual average growth slipping from 4.8 per cent in December 2004 to 4.2 per cent currently," Westvaco said.

Economists are not predicting that interest rates will fall, rather that a close call on whether to raise rates had turned to a hold. The central bank is still regarded as taking a tough line on inflationary pressures.

These still exist because of capacity constraints in the economy and rises in wage rates. However, business opinion surveys have been gloomy, dwelling consents have peaked and population growth has been slowing.

The economists note that the Reserve Bank has been consistently over-ambitious on growth estimates.

The domestic sector remains buoyant, which is a conundrum for the central bank.

"We would consider a further tightening in monetary policy to be the wrong response to that problem," Westpac said.