Brace yourselves – rates to rise again says CBA

With our Aussie dollar gaining rapid value on the world stage due to an historic resources boom, most economists are tipping pretty good odds for a rate rise from the Reserve Bank as early as next month.

After a minor reprieve from the RBA’s succession of interest rate hikes during the first half of the year, it now seems we are likely to be hit with another barrage of increases over the coming months and into the New Year.

One of the first big banks to predict an interest rate rise from the RBA at their October meeting was the Commonwealth. In a report published by The Australian, the bank claims the rise is imminent as the Reserve Bank battles to keep a check on our fast paced economic growth and inflation.

The CBA forecasts an increase in the official cash rate of 25 basis points when the RBA convenes on October 5, while financial markets are suggesting that there’s a 60% chance that the RBA will make its first move in 5 months.

Chief economist with the Commonwealth, Michael Blythe, warns borrowers to brace for a series of rate hikes over the next few months, that will kick off in October and the bank expects the cash rate to hit 6% by the end of the year.

“There is a lot of momentum building up in the economy at the moment, which suggests that rates will have to be raised,” said Mr Blythe.

“Especially given that the bullish commentary and overtones from the RBA, it sounds like they are priming the market that they are going to take the step and move rates. We think there is more to come after an October move as well,” he added.

Adding further fuel to the CBA’s argument, Mr Blythe notes that the threat the RBA is now facing, with the mining boom taking centre stage in the Australian economy, is similar to the conundrum they tackled in the lead up to the Global Financial Crisis.

“There is a resource allocation problem and an unstoppable mining boom,” he said. “The RBA needs to make room for that and the household sector is one area where that room can be found.”

One unknown that might prompt the RBA to delay a series of large increases in the official cash rate is the banks. The major players are still warning consumers of increased funding pressures and resulting potential rate moves above any official increases made by the RBA, leading some experts to suggest that such an occurrence could reduce the likelihood of the RBA moving in succession.

TD Securities strategist Annette Beacher said, “If the RBA take out an ‘insurance’ rate hike next month, the big four banks could add an additional 10 to 20 basis points to variable mortgage rates, ameliorating the need for follow-up tightenings by the end of the year.”


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