Wednesday, February 03, 2010

Going up. Again. Don't doubt it.

At least three more times, then perhaps more

Interest rates are set to climb in the months ahead with the Reserve Bank penciling in several more hikes despite deciding to keep rates on hold at its Tuesday meeting.

The surprise outcome saw the Australian dollar plunge more than one US cent, helped push up the share market almost 2 per cent and left the online bookmaker Centrebet red-faced after having refused to take bets on a rate rise it felt was certain.

"We shot ourselves in the foot," admitted spokesman Neil Evans. "We would have kept every decent investment made. Imagine going to the track and watching something at $1.02 get beat."

Treasurer Wayne Swan acknowledged that the relief from rate rises would be only temporary...

"If the Opposition wants to be taken seriously in this whole debate, it should explain how it proposes to keep interest rates at 1967 levels forever," he told parliament.

The Reserve Bank board said in a statement released after the meeting it considered it likely rates would "need to be adjusted further".

It is aiming to get its cash rate back to the long-term average of around 5 per cent from its present 3.75 per cent.

Its statement effectively credits banks such as Westpac with making that task less demanding by saying "lenders have generally raised rates a little more than the cash rate over recent months."

Reserve Bank calculations show that the extra margin imposed by the banks during both the climb in rates and the fall amounts to 1.00 percentage points.

Westpac's chief economist Bill Evans said he thought that meant the Bank would now lift its cash rate to only 4.5 per cent instead of the previously-expected 5.5 per cent.

The three further rate rises of 0.25 per cent needed to get there would add a further $144 to the monthly cost of servicing a $300,000 mortgage.

The Bank decided to pause its program of rate rises "for the time being" in part because of uncertainty about the strength of retail spending. The bank has no doubt that employment is recovering, declaring that "the rate of unemployment appears to have peaked" but is concerned that retail spending may have slackened in the lead up to Christmas after growing strongly in December.

It is especially keen to see the the December retail figures to be released by the Australian Bureau of Statistics on Thursday.

The bank is concerned that credit remains hard to obtain for "smaller businesses," particularly those wanting to develop commercial property.

It says while global credit markets are functioning much better than a year ago "concerns regarding some sovereigns have increased".

The statement refers to a number of European nations including Greece that are finding it increasingly hard to borrow because of concerns about their creditworthiness. Greece is now having to pay more than 3.00 percentage points above the German borrowing rate compared to 1.50 before November.

Commonwealth Securities economist Craig James praised what he called the "calm measured approach" of the Reserve Bank in withdrawing exceptionally low interest rates.

"Australia started lifting rates well before other countries and it is well advanced down the road. The early actions taken by the Reserve Bank mean that it can pause to assess the full impact of its actions on the economy," he said.

Published in today's  Age 

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