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It's official...interest rates are on the way up

It's official...interest rates are on their way up

Economists tip another rates rise

Economists are predicting another interest rate rise as early as next month after the Reserve Bank today raised the official cash rate.

The central bank has raised official rates to 5 per cent, an increase of 0.25 per cent after 17 months of steady rates.

The figure is the highest the official cash rate has been in more than two years.

A statement from the bank says the move was prompted by signs of a global economic recovery, a growing domestic economy and the continuing rise in household debt.

TD Securities spokesman Stephen Koukoulas says the bank clearly wants to curb borrowing and is hinting at more rises to come.

"Whether it occurs in December or not will depend on the economic data, which comes out between now and then, including in the US economy," Mr Koukoulas said.

"But on balance it looks like a 50-50 bet for another move in December."

HSBC chief economist John Edwards says the Reserve Bank is likely to feel its way forward on further rate rises.

"It'll see the effect of this," Mr Edwards said. "It would no doubt prefer if the announcement effect and consequently the response of borrowers was quite pronounced.

"That might mean that it wouldn't need to actually raise rates quite as much as it otherwise would."

Financial markets are pricing in a rise of 1 per cent over the next year.

Meanwhile, business groups and the farm sector have been disappointed by the decision to raise interest rates.

Peter Hendy from the Australian Chamber of Commerce and Industry says the bank appears intent on stifling growth every time the economy starts performing.

"It is very easy to dampen down an economy but it's very hard to get it going again if you've made a mistake," Mr Hendy said.

"We think that last year when interest rates were increased, a mistake was made and we saw a slowing down in the growth of the economy.

"We're worried the same thing will happen again," he said.

The National Farmers Federation (NFF) says today's increase in rates is a huge blow to the farm sector.

NFF spokesman Charles Burke says it is further pressure on farmers still struggling with the worst drought since Federation.

"Based on previous average farm debt figures, what this will cost will be an increase of in the vicinity of $650 per year for the average farmer to continue to finance his current debt level," Mr Burke said.

The Real Estate Institute of New South Wales says the rates rise should benefit the property market by taking out some of the speculative heat.

It says rate increases will not deter home owners and long-term investors from entering the market.

Economy picking up

In a statement, the Reserve Bank of Australia has said the need for expansionary monetary policy has now passed.

It says conditions in the international economy are clearly improving, the Australian economy is picking up and forecasts for longer-term inflation are starting to tilt up.

It points to the US, Japan, East Asia and China as underpinning an improvement in the international economy.

It says the Australian economy is picking up after the earlier slowdown caused by reduced exports and the drought.

The central bank is also worried about household borrowing, which it says is growing at a much faster rate than would be consistent with economic stability over the longer run.

Federal Treasurer Peter Costello says the rates move is a response to a recovering world economy, which he says is positive for Australia's economic growth.

Mr Costello says home mortgage rates will be at historically low levels despite the rates rise.

"You need to factor in the fact that mortgage interest rates are low by historical standards into the decisions that you make because mortgages are taken out over a long period of time," Mr Costello said.

"So, not withstanding today's rise, the fact is that the mortgage interest rate is still considerably lower than our historical experience."

Buffer

Mr Costello says home buyers cannot expect rates to stay at current levels over a long mortgage.

"Always factor in a buffer in your borrowing decisions," he said. "The fact that interest rates are still low means that people will continue to borrow but factor in a buffer."

Shadow Treasurer Mark Latham says the rise is a warning on home prices and the Government has been blind to the prospect of a housing bust.

"You can't just ignore, repeatedly, warnings from the Reserve Bank, the head of Treasury, the IMF, most professional economists around the country," Mr Latham said.

He says people should prepare for further increases.

Markets

The Australian dollar has retreated after hitting a new six-year high on the back of the rates announcement.

The currency rose as far as 71.18 US cents in the aftermath of the Reserve Bank statement. It is at 71 US cents at 6pm (AEDT).

With Australia's official interest rates now four percentage points above the federal funds rate in the United States, Australian assets have become more attractive to offshore investors.

The share market, meanwhile, has fallen with the All Ordinaries index down 24 points at 3,256 at 6:00pm (AEDT).




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