Braced for interest rate trifecta
Stephen McMahon and staff writers
November 06, 2007 12:00am
AUSTRALIANS should prepare themselves for three more interest rate rises in coming months, which would take variable home lending rates over 9 per cent to a 13-year high.
Economists said inflationary pressures, fuelled by a booming commodities sector and a raft of tax cuts, would almost certainly force the Reserve Bank of Australia to lift rates by 25 basis points to 6.75 per cent at today's meeting.
The RBA board's decision will be announced at 9.30am tomorrow.
If, as expected, interest rates go up, it will the 10th consecutive rate increase since 2002.
Some economists are forecasting rates will rise to 7 per cent at the first RBA meeting next year, in February, and could peak at 7.25 per cent within six months. That would push variable home lending rates to 9.07 per cent and take official rates to their highest level in 13 years.
Investors worried about the effect of the first of the rises, expected tomorrow, and the growing expectation of another global stock market correction pushed the S&P/ASX 200 index down 1.7 per cent yesterday.
Credit losses worry world
Worries that losses from the US sub-prime mortgage crisis will curb corporate profits grew with reports that Citigroup will write down $US11 billion in losses.
Analyst reports suggest rival Wall Street brokerage Merrill Lynch may be forced to follow suit and write down up to $US10 billion in sub-prime related assets.
The Australian Chamber of Commerce and Industry calculates that the rate increase to 6.5 per cent will take $1.8 billion out of the economy over the next year.
But chief executive Peter Hendy admits the cost of letting inflation run out of control could be even higher.
"Inflation is an evil creature and we do not want to let it run out of control," Mr Hendy said.
Inflation building
Yesterday's TD Securities-Melbourne Institute monthly inflation gauge put further pressure on the RBA to lift interest rates.
The inflationary reading showed that underlying inflation in the year to October was 3.2 per cent -- above the RBA's 2-3 per cent target band.
TD Securities senior strategist Joshua Williamson said the strong inflationary pressures had made a rate rise tomorrow a "certainty" and would probably force the RBA to lift interest rates in February and possibly again in May next year.
Currency traders have already fully priced in an interest rate rise.
Investors on the Sydney Futures Exchange price an interest rate rise tomorrow as a 93 per cent possibility.
Yesterday the Australian dollar was trading around US92c, but lifted in late trading to a top of US92.15.
More rate rises next year
ANZ head of Australian economics Tony Pearson is also forecasting the RBA will increase interest rates by 25 basis points in February and May.
"This gives a peak in rates of 7.25 per cent in this cycle, which will be the highest cash rate since June 1996," Mr Pearson said.
He is forecasting this aggressive monetary policy will reduce core inflation to the middle of the RBA's target band by 2009, allowing for potential interest rate cuts.
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