All eyes on next interest rate move

GLENN Stevens will front a parliamentary committee today with the market hanging on every word for a hint of what's next for rates.

INTEREST rates will be be under the spotlight in parliament today.

Reserve Bank of Australia Governor Glenn Stevens will front a parliamentary committee today and nervous home-owners and jittery investors will be scouring his comments for any hint of when the next rate cut might be.

The twice-yearly public hearing comes less than a week after the central bank dropped rates for the first time in nearly seven years and is set against the backdrop of a rapidly slowing economy.

Chairman of the House of Representatives Economics Committee Craig Thomson said a key topic for discussion will be whether the Reserve Bank went too far in raising rates this year.

"We seem to be seeing some different language now and we are very interested as to that position," he said.

"Commentators generally are talking about us moving down now, but I think people out there in mortgage land want to know when."

Last week's rate cut marks an abrupt about-face for the central bank, after rate rises in February and March and talk of a possible increase in May.

The Reserve Bank had lifted rates 10 times prior to this year's moves.

Liberal member of the committee Steve Ciobo said he intended to grill Governor Stevens about the slowing economy and its impact on jobs.

Mr Ciobo, having read the Reserve Bank's recent board minutes and statement, expects more interest rate cuts, although he still wants to know how that fits in with an inflation profile that has yet to peak.

The Reserve Bank has forecast the consumer price index will rise to 5 per cent this year, up from the present level of 4.5 per cent and well outside the central bank's 2 per cent to 3 per cent target band.

Commonwealth Bank of Australia chief economist Michael Blythe expects the committee will quiz Governor Stevens on the forecasts, in light of last week's national accounts for the June quarter.

The gross domestic product showed the economy grew by just 0.3 per cent in the June quarter, less than half the previous quarter.

And consumer spending fell 0.1 per cent, the first contraction since 1993.

On the stock market and foreign exchange, things are also looking grim.

Last week, tumbling commodity prices and investor concerns about the global credit crunch sent the local share market plunging 5 per cent or some $38 billion, while the Aussie dollar continued its descent to hit a year-low of US81.

However, the share market is expected to claw back some ground today, following a rally on Wall Street on Friday night and the US Treasury's decision to rescue beleaguered mortgage finance companies Fannie Mae and Freddie Mac.

The US Treasury is stepping in after Morgan Stanley, which had been hired to analyse the companies' financials, concluded that Freddie, and to a lesser extent Fannie, relied on accounting manoeuvres to meet their capital requirements.

The accounting overstated the value of their actual reserves, the investment bank found.

CommSec chief economist Craig James said local financial stocks would benefit most from the news.

"Certainly anything which takes away some of the uncertainty we've got in the US about the government-sponsored mortgage providers would be very positive," he said.

"Financial stocks will also do well following good gains on Wall Street on Friday, but there will be continued weakness in the resources sector.

"Base metal prices were sharply lower and the oil price was down yet again, so we're probably going to see a bit more of the rotation that we saw last week out of the resource sector and into the financial sector."

This week, the key domestic data releases include ANZ job ads, retail sales and housing finance.

- with AGENCIES