Thursday, May 27, 2010

How many more hikes?

Count your fingers

Australians are being told to brace for much higher interest rates with the OECD predicting at least four more hikes in the year ahead and most likely five.

The international organisation's Economic Outlook released overnight in Paris predicts the Reserve Bank will push up its cash rate from its present 4.5 per cent to 5.1 by December and then 5.7 per cent by next June.

Australia's cash rate at the time would be one of the world's highest, exceeded in the the OECD by only Turkey, Poland, Mexico and Iceland.

The predicition is sharply at odds with that of Australian financial markets which have priced in a tightening of only 0.25 per cent in the year ahead.

The 120 point hike if fully passed on would push up standard variable mortgage rated from their present average of 7.4 per cent to 8.6 per cent, adding an extra $238 to the monthly cost of servicing a typical $300,000 mortgage and $318 to the cost of servicing a $400,000 mortgage.

The total extra costs since rate began climbing from their lows last October would be $540 per month for a $300,000 loan and $720 for a $400,000 loan.

The increase would bring mortgage rates back to the high of 8.55 per cent reached when the Coalition left office but would leave them short of the peak of 9.6 per cent reached under Labor before the Reserve Bank began a series of cuts in response to the global financial crisis...

The Organisation for Economic Co-operation and Development identifies Australia and Poland as the only two of its 30 members to have avoided a recession during the crisis.

It is optimistic about a sharp rebound in Australia's economic growth saying its "dynamism does not seem to have slackened at the beginning of 2010".

"The business climate and business confidence are strong. Firms have significantly expanded their investment plans, particularly in the mining sector, where strong demand from Asian countries has led to marked improvement in the terms of trade and higher profits," the report says.

Although the report is silent on Australia's plan to tax so-called mining super profits it recommends new taxes on financial institutions across its 30 members big enough to collect "2 to 4 per cent of gross domestic product over the long term".

Ahead of the report's release OECD Secretary-General
Angel GurrĂ­a told the ABC the mining tax was one of "a number of preferred ways in which we like to see tax structures work," adding that "whenever there is a price spike it is legitimate for a sharing of that bonanza."

The report describes the increase in Australian real estate prices as "marked" and says it leaves Australia with the highest house prices relative to income of any member other than New Zealand.

It expects demand for Australian real estate to remain strong "bolstered by immigration".

"The current tightening of monetary and fiscal policy is welcome given the rebound in activity", it says warning that rising confidence and more favourable terms of trade might require "a more rapid tightening of monetary policy" than it has forecast.

It expects Australia's economy to grow by 3.2 per cent and 3.6 per cent this year and next, well above the average OECD forecasts of 2.7 and 2.8 per cent.

Published in today's SMH and Age


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