Rate rise may not be last in 2008

Home loan interest rates have topped 9 per cent for the first time in more than a decade following the RBA’s decision, as expected, to raise official interest rates this week. And there is no guarantee there won’t be more to follow with the signs on inflation not looking good in early 2008.

Kevin Rudd is sticking to his election commitment to deliver on $31 billion worth of tax cuts at a time when the economy is motoring along and needs more spending stimulus like it needs a hole in the head.

Retail sales for December put in another solid performance, showing that consumers are not troubled too much by the interest rates rises so far. The retail sector is a large chunk of our economy and sales grew by more than 8 per cent in 2007. This does not augur well for the next set of inflation figures covering the fourth quarter of last year – so there is a risk of a further rate rise in May.

House prices are also again escalating, although the strong gains are outside Sydney and Perth which have already had their run earlier in the decade. The ongoing resources boom and generally buoyant economy is driving demand at a time when housing construction is sluggish. New housing approvals took a 16 per cent drop in December to be lower than they were a year before, so there is little sign yet of housing supply rising to meet demand. Another ingredient for the inflationary cocktail.

At odds with the domestic situation here in Australia is the global backdrop. The RBA is having to lift rates with the distinct possibility there will be a global downturn on the back of US recession later in 2008 or 2009. The risk further down the track is that Australia is left with high interest rates as conditions slow, risking driving the economy into a bigger hole. 2008 will be a tricky year for the RBA and its board members, balancing two such opposing influences on the economy.

Meanwhile, borrowers in the mortgage belts around the country are hurting. Lenders are passing on the RBA’s 0.25 percentage point rise and, in the case of the Commonwealth and AMP, even more so. St George and AMP are two that have lifted their rates up over 9 per cent. Most borrowers should still be paying less than 9 per cent given discounting below the standard variable rate and lower rates of non-bank lenders, but we still have the highest rates in more than a decade in a time of much greater debt levels.

Infochoice.com.au