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Interest rates rise by 0.25%

The Reserve Bank has met today and made the decision to raise the cash rate by 0.25%, taking official rates to 4.75%. This has come as a surprise to many economists – of the 23 surveyed by Bloomberg News, 17 of those believed that inflation is now under control and predicted no change.
The RBA has today opted for a pre-emptive strike on monetary policy by lifting rates despite recent good results on inflation, based on their belief that there is still the chance that inflation may increase over the medium term.
However, there is plenty of good news for the Australian economy. Paul Bloxham, chief economist for Australia and New Zealand at HSBC Holdings, recently stated “The economy is at a ‘sweet spot’.”
Our dollar is strong, with predictions of imminent parity with the US dollar. The mining sector continues to boom. Australia’s unemployment rate was 5.1% in September – about half the level of joblessness in the US and Europe.

Australia is undergoing a hiring boom, with companies such as BHP Billiton and Rio Tinto increasing their shipments of iron ore and coal to China. In fact, a report released on 7th October also revealed that, in September, Australian employers added the most new employees in eight months.

All of this is reassurance that the Australian economy is still in good shape. Of course, that’s why the RBA increased it’s rates – some parts of the economy are growing too quickly.

Our capital city property markets have stalled over the last few months, in part because of decreasing affordability due to rising property values and multiple interst rate rises. And this latest increase will ensure property values will stagnate for a few more months.

And there are more rate rises to come…

The Commonwealth Bank was the first to follow the Reserve Bank’s increase today, increasing its standard variable mortgage rate by 0.45%, nearly double the Reserve Bank’s increase of 0.25%

Commonwealth’s variable home loan interest rate will be 7.81 per cent, effective November 5.

Interestingly at its annual meeting last week, the nation’s biggest lender revealed a $6.1 billion profit for the last financial year. The bank said the move was a result of “continued increases” in funding costs. “We continually monitor our funding costs and whilst they are currently going up, should these costs reduce at a future time we will reduce our interest rates accordingly,” a bank spokesperson said.

Mortgage Choice chief executive Michael Russell said homeowners may end up cutting back on necessities on order to meet the extra mortgage repayments.

The increase in the cash rate would add just over $48 a month to repayments on an average $300,000 mortgage, but the major banks have warned of larger rate increases than official moves because of their more expensive funding costs



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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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