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Home buyers face higher mortgage repayments after the Reserve Bank of Australia (RBA) moved to lift official interest rates by a quarter of a percentage point to 5%.
The November rate increase, the first since June 2002, will add an extra $27 a month to repayments on an average $161,000 mortgage over 30 years.
And it may not end there. Analysts say a rebound in economic growth, the improving world economy and the continuing property boom could lead to two further 0.25% rises in December and February 2004.
The cash rate last hit 5% between April and September 2001.
The RBA had been widely tipped to raise rates in early 2004 against the backdrop of an improving global economy and growing household debt. But a host of recent economic data – much of it positive – convinced the RBA to act sooner rather than later. Key factors include:
- Unemployment hit a 14-year low of 5.6% in September
- Consumer sentiment remains buoyant while business sentiment is improving
- The drought is fading, with predictions of a bumper harvest in 2003/04
- The world economy shows signs of improving.
In a statement, the RBA defended the extended period of low rates but said the recent borrowing binge and runaway house prices now threatened to drive up inflation.
“Credit is rising at around 14 per cent per year (and while) short periods of rapid credit growth have not typically been a major concern for monetary policy, this growth has been sustained for some time and at present shows no sign of abating.
“The Board's view is that it is no longer prudent to continue with such an expansionary policy stance. The strength of demand for credit increases the danger associated with delaying a tightening of monetary policy,” the statement said.
The RBA cited strong domestic demand as another key factor, with both consumption and business investment growing strongly.
“The Australian economy, having slowed under the weight of reduced exports and drought, is now picking up. Strong domestic demand appears to be the main factor so far, with both consumption and business investment growing strongly.
“The housing market (also) continues to be buoyant. The effect of the rise in house prices over recent years is likely to be expansionary for the economy in the period ahead, as higher wealth is accessed to support household spending.”
It wasn’t long ago that analysts were tipping a rate cut. Back in June, fears about the stumbling world economy and Australia’s slowing rate of economic growth led Reserve Bank Governor, Ian Macfarlane, to signal possible rate cuts. As the RBA explained in its 5 November statement, interest rates had been set low in response to weak world conditions, low global inflation and risks to domestic growth.
But as Australia’s economic news gradually improved, Mr Macfarlane repeatedly passed on the opportunity to cut rates. By September, there was renewed talk that the next rate move would be upwards due largely to booming household debt and spiraling housing prices.
As long as official interest rates stayed on hold, so too did variable housing rates - the type favoured by most home buyers (the RBA effectively sets the broad level of variable rates.) Lenders are now expected to begin raising their variable home loan rates in response to the 5 November official rate rise.
Four key factors are likely to determine rates during the next year:
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Global economic factors – specifically signs of a tentative recovery in the US, European and Japanese economies - dominate Australia's rate outlook. A generalised pick-up in global economic conditions will add to pressure to raise rates.
The RBA remains deeply concerned about spiraling household debt and the risks of a property bubble. If this rate rise doesn’t slow the housing market, further rate rises may be inevitable.
The drought is now largely over, removing a key reason to keep rates on hold.
The Federal Government would like to cut taxes before the next federal election, due next year, but the head of the Federal Treasury Department has warned this could force interest rates up.
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