Interest Rates - the only way is up

Borrowers should get ready for a 2 per cent rise in interest rates as the world economy is on the mend and unemployment will not go as high as originally predicted.

Glenn Stevens RBA's Governor informed a parliamentary hearing in Sydney that he did not expect rates to shoot up by that margin overnight, but that buyers should still prepare themselves for a rate rise.

Mr. Stevens also stated that lenders should be applying a test to insure that the borrower could cope with a two percent rate increase.

He went on to say that while interest rates were unusually low at present, they would not be able to stay that way indefinitely, but he would not commit himself to say when the next move might be or by how much rates would rise.

Mr. Stevens told the committee hearing that the world economy was showing signs of life, after some months on the brink of disaster. Although things abroad were not looking too good they were looking a lot better than they did a few months ago.

Mr. Stevens felt that unemployment would rise but not as high as 8.5 per cent as originally forecast in the May Budget, and that it was not just because employees were having their hours cut instead of their jobs.

Government spending had splurged in the early months of the global downturn, sending the Budget into a deficit of more than $30 billion.

Mr. Stevens also informed the committee that the Australian economy could shrink in the coming months. The prospect for a recovery taking place at the end of this year and on into next year remained strong. He also added that growth would start to pick up during 2010.