The Reserve Bank is caught between renewed economic growth and deteriorating household finances, and therefore needs to approach future monetary policy with caution, warns Dr. Ada Claus with The Melbourne Institute.

The MI Bulletin of Economic Trends forecasts renewed growth in the Australian economy of 0.8% in the first quarter of 2010, and 0.6% in the next three quarters. It anticipates inflation rising to 2.5% in the first quarter but easing off as the year progresses. However, housing prices are also rising, underlining the high demand and low supply dogging the market.

However, the Bulletin’s index of household financial conditions declined 16.6% in the first quarter of 2010, to 28.8 points, its first decline following four consecutive quarterly improvements.

In the index details, 14.4% of households consider themselves to be financially stressed. More than half of those households are employed, with the largest number of stressed households consisting of those employed with a combined income of greater than $80,000.

The increased cost of consumer debt has contributed to the deterioration in household finances, and follows the RBA’s swift tightening of monetary policy by a full percentage point since October 2009.

The statement issued by Dr. Claus Friday last discussed the difficulty of the RBA’s current position.

“Rises in house prices and associated rises in consumer debt seem to warrant a swift tightening in monetary policy,” Dr. Claus said. “But if the tightening is too fast it may choke-off business investment that is only now starting to recover.

“This means that if the RBA gets policy wrong, Australia may experience a W-shaped recovery.”

The MI household financial index by the states:
•    Western Australia declined −17.7%
•    Victoria declined −6.9%
•    Queensland declined −6.7%
•    New South Wales declined −1.9%
•    South Australia increased 7.8%

Source: http://news.smh.com.au/breaking-news-business/household-finances-a-problem-report-20100319-qjgd.html