Tuesday, November 03, 2009

0.25% and another 0.25%... and that's just the start

Here's the Reserve Bank's statement

Here's my piece for the National Times:

Many of us can probably spare the best part of an extra $50 per month for mortgage repayments. Many of us could probably spare the best part of an extra $50 we were saddled with last month. But for how long?

Each time the Reserve Bank hikes its cash rate 0.25 per cent and our mortgage provider passed it on we are slugged with an extra $46 or more per month in repayments on a $300,000 mortgage.

For how long is it going to keep happening?

Today's Reserve Bank statement has clues.

In contrast to the Treasury which Monday revealed it doesn't expect a return to normal economic growth for some time, the Reserve Bank expects growth "close to trend over the year ahead".

That means a return to a so-called "neutral" cash rate over the year ahead. A neutral rate is one that neither stimulates economic activity nor winds it back in.

In the past the Bank has dropped hints that that rate is somewhere between 5 per cent and 6 per cent.

Let's do the maths...

To get to 5 per cent - lower bound of neutral - from 3.5 per cent would need a further six hikes like today's in fairly short order.

Yes. Six further interest rate hikes, enough to take the standard variable mortgage rate up from $6.31 per cent where it is about to be after today's hike to 7.81 per cent. The extra damage - a further $287 per month, or a grand total of an extra $380 per month since the hikes bean in September.

It might not happen. It is widely believed that the Treasury Secretary Ken Henry has argued against rat rises around the Reserve Bank board table. He might sometimes win.

But it could be even more. Remember that 5 per cent is believed to be the LOWER bound of what the Reserve Bank thinks of as neutral.

But the sad truth is that if you can't afford to pay an extra $300 or so per month you shouldn't have a mortgage. Last Melbourne Cup Day the standard variable mortgage rate stood at around 8 per cent.

It was never reasonable to think it wouldn't go back there.

Related Posts:

. Expect intense debate around the boardroom table

. Why push up rates at all? - Argy

. Hockeynomics - at times an embarrassment