Reserve acts on inflation - How will this affect you?

Australia's stubbornly high inflation rate and fall-out from the global credit squeeze could keep home loan interest rates high for the rest of the year, ANZ senior economist Paul Braddick has warned.

With official interest rates at a 12-year high, the Reserve Bank of Australia (RBA) has foreshadowed a wait and see approach as it looks for sign of easing in spending and economic growth.

In early March 2008, the RBA raised the Official Cash Rate (OCR) to 7.25 per cent - the third rate hike since November 2007. The RBA kept rates on hold in April and May as it monitored the impact of recent hikes on spending and inflation.

Meanwhile, the global credit crunch arising from the US sub-prime mortgage melt-down has forced some lenders to raise rates further in order to cover the higher cost of funds on wholesale markets.

Why rates are rising
Mr Braddick said the RBA would keep a "tightening bias" for the next few months as it studied the economy for signs that the last few rate rises are having the desired effect.

"Underlying inflationary pressures have risen sharply over the past year and the Reserve Bank had little choice but to tighten monetary policy further in February and again in March." Core inflation is already above the RBA's 2-3 per cent target band and is widely forecast to trend higher in the first half of 2008, he said.

However Mr Braddick said the wider economic outlook remained strong and the prospects for employment and growth were positive.

"Despite a marked slowing of US economic activity, the global economic backdrop remains supportive and bulk commodity prices are expected to rise substantially further this year supported by rampant Chinese demand and constrained global supply. Labour markets also continue to tighten and wage pressures are mounting maintaining upward pressure on inflation and interest rates."

Tips for coping with rising rates
Nobody likes to pay more on their home loan and there are plenty of small steps home loan borrowers can take today to reduce the impact of rate rises in the future. Here are some suggestions:

1. Pay more on your mortgage from the start. You can to build equity and reduce the total interest cost.
2. Try to pay off all credit cards and consumer debt each month to avoid interest payments.
3. Consolidate your debt. Speak to ANZ about the possibility of combining your credit card, car loan and home loan into the one account.
4. Ask your lender about a mortgage offset account. Have your pay deposited directly into your account and you may be able to start reducing your interest immediately.
5. Deposit any extra money such as bonuses or tax returns directly into your loan account.
6. Consider refinancing to a split rate home loan or a fixed rate home loan (Always seek professional advice before making major financial decisions).

Next article

Inflation risk grows as economy steams ahead - the latest from Economics@ANZ

Related links

• Split rate home loans - a quick guide - Edition 26 Summer 2007
• Home loan features - a simple guide - Edition 24 Winter 2006
• Fixed versus variable interest rate - which is best? - Edition 18 Autumn 2005