Banks pounce on interest rate hike

The RBA’s sixth hike in eight months takes the official cash rate target to 4.5 per cent and will add about $48 a month to mortgage repayments on a $300,000 loan with a 25-year term.

The Commonwealth Bank was the first of the big banks to announce it was lifting its rates following the RBA decision.

The 0.25 per cent rise takes the bank’s standard variable home loan rate to 7.36 per cent.

National Australia Bank later lifted its standard variable home loan interest rate to 7.24 per cent, effective from Friday.

Westpac followed suit, lifting its standard variable rate which will sit at 7.51 per cent from Friday, before ANZ completed the quartet saying its standard variable rate will rise to 7.41 per cent.

Reserve Bank governor Glenn Stevens has repeatedly stated Australia’s economic growth is returning to around average levels and interest rates also need to return to about average.

Most economists expect that average level to be around 4.5 to 5 per cent, leaving many analysts forecasting a pause in rate rises after today’s move.

Financial markets were not surprised by the move, with 18 out 24 market economists surveyed by Bloomberg expecting rates to rise by 0.25 percentage points.

Mr Stevens said inflation has not fallen as much as forecast and is likely to be in the upper half of the RBA’s 2 to 3 per cent target band.

However, for the first time, he also says interest rates for most borrowers are now back around average levels.

“The board expects that, as a result of today’s decision, rates for most borrowers will be around average levels,” he noted in his statement.

“This represents a significant adjustment from the very expansionary settings reached a year ago.”

However Mr Stevens warned Australia’s terms of trade are rising by more than expected and this year will probably regain the peak seen in 2008.

“This will add to incomes and foster a build-up in investment in the resources sector,” he said.

“Under these conditions, output growth over the year ahead is likely to exceed that seen last year, even though the effects of earlier expansionary policy measures will be diminishing.”

The Reserve Bank has previously said its aim in the short-term was to get rates back to average to match Australia’s current level of economic growth.

The Australian dollar fell slightly after the announcement on speculation the Reserve Bank may now pause before its next rate rise.

‘Tough for families’

Federal Treasurer Wayne Swan says today’s rate rise is tough for families and small businesses.

“Unfortunately this is one of the difficult consequences of an economy that is recovering better than other advanced economies, but as the Reserve Bank itself has observed today, rates are returning to more normal levels,” he said.

He says mortgage holders should remember that rates are still significantly lower than they were at their peak.

Mr Swan says the RBA’s decision does not put further pressure on him to deliver a tight budget next Tuesday, saying it will be a “no-frills budget”.

The Federal Opposition says the Government has failed to keep interest rates down.

Opposition treasury spokesman Joe Hockey says the interest rate rise makes life more expensive and difficult for families.

“For everyday Australians this is the head-high tackle they did not deserve,” Mr Hockey said.

Mr Hockey says the Government has also failed to stop the banks from increasing their interest rates by more than just the cash rate.

“We’ve seen increases in interest rates in recent months. Those increases haven’t stopped the price of real estate going up, yet [Kevin] Rudd promised the Australian people faithfully that he would make housing more affordable. This is another policy failure,” Mr Hockey said.

“Wayne Swan can huff and puff and try and blow the banks down, but he fails every time because the banks are putting up interest rates by more than the cash rate margin.”

Business pain

Business groups say the interest rate rise takes rates above average levels and may damage the economic recovery.

The RBA says its move to raise interest rates to 4.5 per cent takes most lending rates back to average levels, but the Australian Industry Group and Housing Industry Association argue interest rates on many business loans are above average.

Chamber of Commerce and Industry spokesman Greg Evans says the rate rise will cause difficulty for businesses and he called on the Reserve Bank to put rates on hold.

“We have households now facing mortgages of 7 per cent plus, we have small businesses facing overdraft levels of 10 per cent plus, so these are the sorts of conditions we’re concerned are starting to bite and will potentially affect overall demand conditions in the economy,” Mr Evans said.

Manufacturers say the rising interest rates are also hurting them through a rising Australian dollar.

But JP Morgan economist Helen Kevans says the rate rises have not hit consumers yet.

“We probably need another 50 to 75 basis points of tightening before those rate hikes really start to bite,” Ms Kevans said.

JP Morgan is forecasting official interest rates to hit 6.25 per cent by the end of next year.
SOURCE: ABC News



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