Households on edge over interest rates

ECONOMISTS fear a June interest rate increase could push households "over the edge" - and with them, house prices.

Houseprices

ECONOMISTS fear a June interest rate increase could push households "over the edge" amid signs the Federal Budget's spending cuts knocked another hole in consumer confidence.

The stark warning came as ratings agency Moody's downgraded the credit-worthiness of Australia's big four banks, sparking concerns that higher borrowing costs would force them to lift interest rates outside the Reserve Bank's official cycle.

AMP chief economist Shane Oliver said that it would be "dangerous" for the RBA to raise the official interest rate when it meets on June 7 given Australia's overvalued property market and high household debt.

"House price softness, along with weak consumer spending and low levels of confidence regarding family finances, suggests households are already struggling and are good reasons for the RBA to tread cautiously," he said.

"Further interest rate hikes, particularly before the economy has recovered from the current soft patch, risk knocking households over the edge - and with them, house prices."

The Westpac-Melbourne Institute index of consumer sentiment showed yesterday that household confidence is at its lowest level since June last year - the month following three consecutive interest rate hikes from the RBA - suggesting that the Federal Budget's roll-back on middle-class welfare is worrying families.

The mood of extreme caution among consumers continues to hurt retailers, with Commonwealth Bank's business sales indicator for April revealing that retail sales experienced the biggest sales slump of any industry in Australia during the month.

Westpac chief economist Bill Evans said that despite the soft economic data he still expected the Reserve Bank to raise interest rates next month.

"It is now using language which has, in the past, been used in the month leading up to a rate hike," he said.

"A rate hike next month will be a brave decision."

In one bright spot for mortgage holders, the Australian Bureau of Statistics' labour price index indicated that wages rose 3.8 per cent - below the 4 per cent level that rings alarm bells at the RBA - in the year to March 31.

TD Securities economist Randall Roland sought to hose down fears that Australia's big four banks would lift interest rates independent of the RBA following the Moody's downgrade.

He said the big four banks were likely to improve the quality of their funding bases given that "banks have, since the financial crisis, been working to reduce reliance on foreign and short-term funding" and "Australia's household savings rate has increased strongly in recent years".

Moody's downgraded the big four banks to Aa2 from Aa1.