Rates rise - another tipped

09/08/2007

MARKET watchers predict the Reserve Bank will raise interest rates again within six months to cool the booming economy, with housing prices now rising 1 per cent each month and new lending hitting record levels.

Yesterday's interest rate rise, of 0.25 percentage points, will raise the standard variable home loan rate to around 8.3 per cent.

And a Reuters survey has now found that just over half of financial institutions are predicting a second rise within months.

Victorians taking on the average new mortgage of $230,000 will pay an extra $38 a month from this rise. They are paying an extra $192 a month from the five rises since the 2004 election. On a $300,000 mortgage, homebuyers will pay $50 a month more, and the last five rises have cost them an extra $240 a month.

Reserve governor Glenn Stevens said strong domestic conditions, strong demand for finance and the jump in underlying inflation explained why the bank had raised rates now, instead of waiting until after the election.

The Reserve almost always delivers rate rises several at a time. They came in pairs in 2002 and 2003, in threes in 1994 and 2006, as a quintet in 1999-2000 and as a large, confused heap in 1988-89. Only in 2005 was the bank content with a single rise.

In the Reuters survey, 25 banks and finance houses forecast a 60 per cent chance that this rise will lead to another either late this year or early next year.

"History shows that in this cycle, rate moves have not tended to be one-offs — although the higher rates go, the tougher it becomes for the Reserve to tighten again," said Westpac chief economist Bill Evans. "Another move has to be the most likely outcome."

The latest rise lifts the Reserve's official cash rate to 6.5 per cent, the highest level since 1996.

The banks are likely to move later this week to lift their standard variable lending rate from 8.07 to 8.32 per cent, also the highest since 1996.

Yesterday two smaller banks moved quickly to pass on the rate rise to depositors with online accounts.

HBOS subsidiary BankWest, now trying to break in to the east coast, lifted its deposit rates by 0.2 percentage points, while web-based bank ING Direct raised a range of deposit rates.

The rate rise was bad news for almost 3 million households paying off mortgages and for younger and lower-income households now renting but hoping to buy their own homes.

Prime Minister John Howard, whose campaign advertisements in 2004 promised to "keep interest rates at record lows", told Parliament he regretted the rate rise, the fifth since he made interest rates the central issue of that campaign.