Peter Martin, smh
Interest rate rises to deliver more pain for homebuyersspeculators
THE Reserve Bank will raise interest rates within weeks of Tuesday's federal budget - regardless of its content.
Releasing its latest economic forecasts yesterday, the central bank said that unless it acted swiftly, inflation would climb to the top of its target band and then exceed it.
The Reserve has held its official cash rate steady at 4.75 per cent since Melbourne Cup Day last year. The next opportunity to move will be at its board meeting on June 7 - four weeks after the budget.
A 0.25 percentage point increase would push variable mortgage rates charged by Westpac, the Commonwealth and ANZ banks above 8 per cent, and add about $50 to the monthly cost of servicing a $300,000 loan.
But the bank has signalled that the next rise will be the first of several. Financial markets had already pencilled in two - in early 2012 and mid-2013.
The bank yesterday presented forecasts showing that if those were the only increases, the underlying inflation rate would shoot to the top of its 2 to 3 per cent target band by December this year and to 3.25 per cent by December 2013.
Signalling it would not be dissuaded if figures to be released on June 1 showed the economy contracted in the March quarter, the bank said it would "look through the volatility in inflation and economic activity as a result of the natural disasters during the summer".
It would set rates "to ensure a continuation of the low and stable inflation that has made an important contribution to Australia's strong economic performance over the past two decades".
The bank expects inflation to accelerate as wages climb in response to falling unemployment and is concerned mining companies will "compete aggressively for labour", pressuring wages further.
It expects economic growth to accelerate to 4.25 per cent by the end of this year, and ease to 3.75 per cent by December 2013 as the high Australian dollar eats into the profitability of non-mining companies.
Also driving inflation will be higher utilities charges (especially electricity) and rents, with a more stable dollar no longer holding back import prices.
The dollar yesterday jumped half a cent to 107 US cents on the Reserve Bank's statement, despite falling international commodity prices.
Economists from Westpac, Nomura, HSBC, Deutsche Bank and the ANZ all switched their forecasts to a June rate rise, followed by more as needed to contain inflation.
Westpac chief executive Gail Kelly said on Wednesday Australians would not be able to handle more than one rate hike for the remainder of the year.
Treasurer Wayne Swan warned against "jumping to conclusions'' about future Reserve decisions. "The Reserve Bank takes its decisions independently of the government, but the government is playing its role in bringing our budget back to surplus in 2012-13 and building those surpluses over time to make sure we make room for the investment boom," he said.
A Senate inquiry has rejected calls for Australia Post to go into banking to provide more competition in the mortgage market and called for a new inquiry into the financial system.
Read more: http://www.theage.com.au/national/interest-rate-rises-to-deliver-more-pain-for-home-buyers-20110506-1ec91.html#ixzz1LaJV0sJT
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