Interest Rates on the Rise Again!

The Reserve Bank is struggling to keep runaway spending under control, prompting forecasts of another official interest rate rise within the next three months.

Shares and the dollar jumped yesterday after the bank increased its cash rate by 25 basis points to 6.75 per cent, accompanied by an official warning that inflation could spike outside its 2-3 per cent target. The rate increase was the 10th in the current rising cycle, meaning that the official rate has now risen by 2.5% since its record low in 2001. Interest rates are at their highest since July 1996 and the average standard variable mortgage is now at 8.57 per cent, although discounts to this are still available.

The pricing of a hike next month is now at 43 per cent, but a move in February - which is after the next set of inflation numbers - is priced at a certain 100 per cent. The widening rate difference between Australia and the US sent our dollar soaring last night. It was trading in Australia at US93.74c, yet another 23-year high - great news for travellers.

In a statement accompanying the rise, bank governor Glenn Stevens said there were signs inflation in the March quarter next year could exceed 3 per cent. Economists noted the bank's strong focus on the need to slow the broader economy.

"The rise in the exchange rate will help contain pressures on prices," Mr Stevens said. "But growth in aggregate demand will, nonetheless, need to moderate if inflation is to be kept to 2-3 per cent in the medium term".

The bank is expected to increase the inflation outlook to 3.25 per cent when it publishes its monetary policy statement on Monday. "By the March quarter of next year both headline and underlying measures of inflation are likely to be above 3 per cent," Mr Stevens said.

However, CommSec chief economist Craig James said the impact of interest rate rises on discretionary spending was not strong because it was offset by higher after-tax income. Mr James said, from the six rate rises in the past three years, repayments on an average mortgage would have risen by $50 a week, but household income was up $130 a week.

Meanwhile, the rise is better news for investors as banks also rushed to pass on the rise to deposit accounts. Most institutions have now increased their online saver rates by the full 25 basis points.

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Published on November 11-th, 2007 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.
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