The Reserve Bank has signalled more home loan interest rate rises are on the way after it yesterday lifted the cash rate to 4 per cent…

The RBA raised interest rates by 0.25 percentage points in a move widely expected by economists, and most predict rates will rise about one percentage point over the remainder of 2010.

The big banks wasted no time following the RBA’s lead.

The Commonwealth Bank announced within 90 minutes of the RBA’s decision that it would raise interest rates on its home loans by 25 basis points to 6.86 per cent.

The CBA’s changes will affect new and existing customers from Friday.

ANZ also raised its standard variable rate by 25 basis points to 6.91 per cent.

The increase means homeowners repaying an average $300,000, 25-year loan monthly on a standard variable rate of 6.90 per cent will pay almost $50 more each month.

What homeowners will pay

Mortgage Repayment Change

$100,000 $700.41 $15.80

$150,000 $1,050.62 $23.70

$200,000 $1,400.83 $31.61

$250,000 $1,751.03 $39.51

$300,000 $2,101.24 $47.41

$350,000 $2,451.44 $55.31

$400,000 $2,801.65 $63.21

$450,000 $3,151.86 $71.11

$500,000 $3,502.06 $79.01

Announcing the decision, RBA governor Glenn Stevens said lending rates were still below average.

“The board judges that with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average,” he said in a statement.

“Today’s decision is a further step in that process.”

The RBA lifted the official cash rate three times last year in October, November and December.

It did not meet in January and held off raising rates last month, but a string of strong Australian economic data convinced the bank to tighten its monetary policy sooner rather than later.

Housing woes

Housing Industry Association senior economist Ben Phillips says dwelling construction could take a hit as rates go up, worsening the housing shortage.

“The concern the industry has is that the RBA might be hiking rates a little too hastily,” Mr Phillips said.

“We’d certainly caution against going a little too quickly on the interest rate button over the course of this year.

“If interest rates are hiked too high and too quickly that will spook potential buyers from the market, particularly in the first home buyer end of the market who are probably very sensitive to the interest rates.

“On the investor side, which is an area where we haven’t seen any recovery yet, there’s also concern that that will also be spooked by higher interest rates.”

Economy improving

Treasurer Wayne Swan says while the rate rise will be hard for homeowners with mortgages, it is a sign the economy is improving.

“The economy is recovering and rate rises are an inevitable consequence of a recovering economy that is outperforming the rest of the world,” he said.

“I think it’s important to understand that rates are still at 1970s lows. Although for someone with a mortgage it’s tough stumping up an extra $50 a month.

But the Opposition’s treasury spokesman, Joe Hockey, says the Government is spending too much money and forcing the Reserve Bank to act.

“The Reserve Bank is increasing interest rates faster and higher than any other comparable country in the world,” he said.

“Kevin Rudd is responsible for this interest rate increase. Kevin Rudd is responsible for the pain Australian families are going to have to go through.”

Consecutive hikes unlikely

JP Morgan interest rate strategist Sally Auld says it is unlikely the RBA will approve a string of consecutive rate hikes like it did last year.

“Essentially what they’re in the process of doing is just returning rates to long-term average levels,” she said.

“They quite like the concept of a neutral policy setting, and they’re a little bit away from that where they are at the moment.

“So I think the idea is there will be more rate rises to come over the course of 2010.”

Fourteen out of 19 economists surveyed by Bloomberg had expected rates to rise, although many were not certain of their predictions.

Financial markets were factoring in a 62 per cent chance of rates rising according to a widely watched index of futures trades.


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