Reserve plays a waiting game as economy warms Consumer sentiment has been improving for several months. Photo: Glenn Hunt The bad news for mortgage holders and small business is that a growing number of economists are predicting the Reserve Bank's interest rate cuts are over for this year. The glimmer of good news is that Australians have been busy paying off home loans and fewer will be affected if monetary easing is over. The overwhelming majority of experts expect rates will be kept on hold when the RBA meets on Tuesday. New data out of the St George-Melbourne Institute Household Financial Conditions Report suggests that after more than a year of rate cuts Australians have been busy paying down debt and reducing the size of mortgages. That portion of the population who own their house outright (without a mortgage) has increased to 45.6 per cent against 40.2 per cent in the previous quarter to December. Historically, about a third of households were renters, a third had a mortgage and a third owned their house unencumbered. The renters now make up only 15 per cent of households, according to the report. These statistics are remarkable, given they suggest about one in eight mortgage holders managed to pay it off in three months. This compares with Australian Bureau of Statistics census numbers back in 2011 that said about a third of households had a mortgage. This suggests there should be some wriggle room in the St George-Melbourne Institute numbers - as they tend to jump around a bit. But there is a clear trend across Australian households - we are chipping away at debt and saving more. The survey also clocks an increasing number of people who are saving, and a good proportion are saving a lot. The favoured place to save is bank deposits. Based on the effect on consumer sentiment, there is no doubt that falling interest rates are a positive for households, but the balance between savers and borrowers is changing. All households are sensitive to interest rate movements - but increasingly, relatively fewer are disadvantaged by rate rises. There is still pain felt when interest rates move up, not the least of which by small business. Small and medium businesses would love to see interest rates fall by 25 to 50 basis points by the end of the year. But this appears increasingly unlikely. At this point the noises from the Reserve Bank point to rates remaining where they are until there is better clarity about how the economy is faring. While the RBA is keeping its options open, its rhetoric suggests it believes it has already done enough on rates to kick-start consumers into spending. The inflation genie remains in the bottle, so there is scope to lower rates further if the economy is more fragile. But at this stage a couple of strong labour and retail statistics appear to have satisfied the RBA that it does not need to use its monetary wand to stimulate growth now. Consumer sentiment has been improving for several months - motivated by strong sharemarket gains since September last year and a mildly improving property market. However, events in Cyprus over the past three weeks are a timely reminder that the European debt crisis has been treated but not cured and that even in Australia we retain some nervousness about Europe's potential global contagion. Those that have been arguing most fiercely for an interest rate cut are focusing on the concerns about business investment once the mining industry capital expenditure cycle peaks over the next year. The stubbornly high dollar and still fairly limp consumer demand have combined to wipe out much of the business investment from manufacturing industry and to date there is nothing to replace it when mining capital expenditure slows. Dun & Bradstreet's National Business Expectations Survey, released on Monday, was yet another reminder that there is a looming hole in business expenditure on the horizon. The message from the RBA is that while investment has been retarded by the high Australian dollar the result has been a pleasant improvement in business productivity. Companies are spending less, ridding themselves of marginal manufacturing facilities and businesses and cutting the workforce. The Dun & Bradstreet report says the patchy economic recovery is responsible for business caution. Only 7 per cent of executives are looking for fresh finance over the next quarter but 40 per cent are looking to pay down debt. The approaching federal election is only exacerbating the uncertainty. While most believe the Liberals will be swept into power, the business community has no real feel for how the as yet unstated policies will affect them. Meanwhile, consumers who are saving have distinct priorities on what to do with the money. First is saving for a house deposit, second is home improvement and third is to buy a holiday.