No interest-rate respite for borrowers

Interest rates could be on the rise again as soon as March as the Reserve Bank warns inflation remains "uncomfortably high" and the job market’s relentless growth path continues.

The RBA was unusually candid on where it sees interest rates heading in its quarterly statement this week, warning that "monetary policy is likely to need to be tighter in the period ahead" as the "the risk of inflation remaining uncomfortably high for some time is considerable".

If the RBA feels disposed to such frankness then it follows that it probably sees the need for more rates hikes sooner rather than later. The latest jobs figures don’t do anything to contradict that. Unemployment fell to a new low of 4.1 per cent in January, its lowest level in 34 years, on the back of strong growth in part-time jobs.

Consumer sentiment fell in Australia in January for the second month in a row as higher interest rates and sharemarket falls hit home. This may suggest the RBA is starting to see results from its monetary policy action but it is unlikely to prevent more if it. Predictions for another 0.25 percentage point rise next month and a further increase in May are hard to argue with. This would push variable mortgage rates up to between 9 and 9.5 per cent for most borrowers.

The RBA does say its higher rates outlook is subject to there being no "further shift in economic risks to the downside", that is, no worsening of the prospects for a recession in the US. But with US Federal Reserve chairman Ben Bernanke signaling readiness to cut rates further over there, and the confirmation of a $150 billion US government stimulus package, our major economic risk may now be reduced.

Infochoice.com.au