Brace for more rates pain

Chris Zappone

March 1, 2010

Comments 37

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Property: heartbreaking prices

Property editor Marika Dobbin takes a look at the property results from the weekend.

Home owners are bracing for more pain, with analysts predicting the Reserve Bank will raise interest rates tomorrow.

A majority of economists polled by Bloomberg forecast the RBA will lift interest rates tomorrow, while the Credit Suisse debt markets put the chance of a rise at 62 per cent - moving from up from a 49 per cent chance at the end of last week.

Home loan, borrowing and repayments calculators

A 25-basis point-increase, taking the official interest rate to 4 per cent, would add $46 to the monthly cost of an average $300,000 mortgage if it is passed on by the banks in full.

However, the TD-Melbourne Institute inflation gauge released today showed inflation rose by a relatively slow 0.1 per cent in February, after jumping by 0.8 per cent rise in January - and that could temper the RBA's view on whether to move on rates tomorrow or in the months ahead.

At the moment, the average standard variable rate - the most popular type of mortgage - stands at 6.63 per cent for the big four banks.

The last time the RBA raised rates was in December.

"We think a 25-basis-point hike is in store with recent indications the local economy has been ticking along at a solid clip," said Michael Turner, economist at 4Cast Ltd.

Rising interest rates will add an unwelcome cost to the estimated 250,000 first-time home buyers who entered the housing market in the past 18 months, lured by low interest rates and the government boost to first home buyers' grants.

In February the Reserve Bank board signalled a willingness to continue to raise rates "if economic conditions evolved broadly as expected".

But it opted to keep rates on hold last month at 3.75 per cent, in part because in December, some banks had raised rates by more than the official increase.

Since then, business confidence has risen, home prices have climbed and the jobless rate fell unexpectedly.

"Concerns over the sustainability of the recovery in the major advanced economies still present some risk (the RBA) holds off," said Mr Turner, "but with another bunch of strong numbers expected in Australia this week on balance a hike seems likely."

Inflation, which the RBA attempts to keep between 2 and 3 per cent, rose to 2.1 per cent in the year to the December quarter, from 1.3 per cent in year to September.

czappone@fairfax.com.au

BusinessDay

37 comments

Oh come on, the RBA aren't going to raise interest rates, what a leg-pull. The RBA knows that any further rises at all will trigger a mild housing deflation (despite all the desperate spruiking being done by APM on behalf of real estate mediocrities). The RBA and their political governors are middle- aged people who own investment properties. There is not a chance they will do anything to subvert these ill-gotten capital gains. They will have to pretend to be responsible economic managers, of course. That is why they have Ross Gittens as their front of house and apologist in chief. Ross has been telling us how brave and a-political are the RBA in making a few tiny interest rate rises last year, such that they are now at 35 year lows instead of 40 year lows. The rates will have to stay that way too, such is the addiction to that great opiate, property investment paradise. If it ends, so does the Australian psyche itself, and third-rate baby boomers are plunged into retirement hell.

Commenter

Maria

Location

Sydney

Date and time

March 01, 2010, 9:55AM
Hi, RBA, instead of raising 0.25% in rate, raise more ... say 1% or 0.5% !!! to avoid inflation and asset bubble...

Commenter

Martin

Location

Melbourne

Date and time

March 01, 2010, 10:05AM
What really peeves me off is when they say "lower unemployment - lets raise rates etc"

Well guess what... I'm just about to lose my job "due to internal restructuring" - and they have the gall to say look on the internal job bulletin. Hmmpf. A technical company gets taken over by a sales company, and the only things on the rotten thing are all sales job/management

And with upcoming (hopefully) contract wins, who knows how many new staff will be needed. Why not wait til we find out if we win or not. I already have my security clearance required if won, no waiting for 3 months etc etc

This really pisses me off

Commenter

abs

Date and time

March 01, 2010, 10:19AM
@ Maria | Sydney - March 01, 2010, 10:55AM
You either live in a vacuum or have one between your ears. Neither you nor I can borrow money from the reserve bank and therefore the effective interest rate is a more important measure. Our local banks are paying a premium for the cash which they have to source from overseas to onlend to you and I, therefore the effective interest rate is not at 35 year lows. The facts are that we are one of the very few economies in the world currently raising interest rates. A raise in RBA rates encourages the carry trade which increases the value of the Aussie dollar, which harms exports, increases imports and thus further increases the balance of trade problems we have.
Inflation is currently not a concern, which is what the RBA used to constantly tell us was their primary reason for tweaking rates. The RBA should NOT be using interest rate policy to target a small section of the economy (housing) at the expense of the rest of the economy.

Commenter

Gilly

Location

Melbourne

Date and time

March 01, 2010, 10:17AM
Do the RBA have a choice? Several reserve bank members have taken to the mainstream media spruking the next 20 years of prosperity for Australia. They are also painting a very rosey picture for the short term.

All of this has fed into the minds and attitudes of the general population who have hit consumables and housing at a rapid rate. To not pur up interest rates suggests that they are not believers in the things they spruik.

Nothing short of .50 would convince me that the RBA see's any real growth, or potential growth in our economy. Even worse it may also represent the fact that housing got away from them and they now feel hamstrung. Raise them (rates) and watch the cracks appear, leave them on hold and watch it balloon into a nightmare?!

Time will tell

Commenter

SmokandMirrors

Location

Melbourne

Date and time

March 01, 2010, 10:09AM
Once again, a Herald blog where the first and only comment is just certain to get lots of chat going...

Maria - paranoid much?

Although I guess given what I said above, you could say the same about me...

Commenter

David

Location

Sydney

Date and time

March 01, 2010, 10:05AM
It is becoming tiresome, but I will have to explain it once more. In relation to interest rates RBA is pretty much a toothless tiger. Evrey man and his dog knows, that during 90s of the last century RBA has kiled the economy by hiking rates to 16%. For every dollar earned back then there was 45 c worth of debt. With the previous Government's obsession on saving income growth started to lag cost of living, so now we have around $1.70 of debt per every dollar earned. It is almost 4 times debt ratio of 90s. That means that now one percentage point of rate rise now is removing from the economy roughly 4 times the amount of capital that it did 20 or so years ago. Which means that today's level of interest rates is as detrimental to the economy as double digit rates of 90s. And Maria from Sydney - apart from the fact that you sound like a bitter loser - it is unfair to accuse RBA for not attempting to crash housing market. They have vested interest in shares, and forcing people into shares is their main priority. The only problem with that - you can not crash housing market without crashing economy (which means crashing share market). So instead of wasting time on being bitter and twisted better start figuring out what you can do in terms of getting yourself onto property ladder.

Commenter

Michael

Location

Sydney

Date and time

March 01, 2010, 10:27AM
Martin: Why stop asset inflation???? In Australia, rising house prices allows hard working people to gain real wealth with no risk. The only people missing out are the young bludgers we have these days. If you can't afford a house, get a better paying job ... If you can't get a better paying job, get two or three jobs.

Commenter

Michael K

Location

Brisbane

Date and time

March 01, 2010, 10:26AM
I hope the RBA is taking notice of the Soaring ALP State Taxes and Utilities Charges with people being stretched financially. The Federal ALP wants to charge Carbon Currency Taxes. They are causing inflation to rise. It will be the children who will suffer when their parents lose their homes.

Commenter

Acushla

Date and time

March 01, 2010, 10:26AM
If the economy needs cooling (which I don't agree with at this stage), the govt would be better off putting up the compulsory super rate than 'allowing' the RBA to put up interest rates. Putting up the compulsory super rate would take money off consumers in a much more broad-based manner than increasing interest rates and would potentially enhance infrastructure and other investment (if the fund managers who get their hands on the extra money spend it right). It will also benefit all wages earners long term by enhancing their retirement savings.

Win win win (except for those saving for a house as their weekly deposit savings will be lower, although when they do buy interest rates will be lower and they might have a train station nearby).

Commenter

Barns

Location

Sydney

Date and time

March 01, 2010, 10:46AM