Fed: A big interest rate headache looms for homeowners

AAP General News (Australia)
08-04-2006
Fed: A big interest rate headache looms for homeowners

By Shane Wright, Economics Correspondent

CANBERRA, Aug 4 AAP - Home owners have a problem.

Do they hope world, and by extension Australian, economic conditions slow and take
pressure off domestic interest rates?

Or do they take an extra job, max-out the credit card, and cop another interest rate hike?

That's effectively the choice delivered to them by the Reserve Bank in its quarterly
statement on monetary policy, released two days after the central bank lifted official
interest rates to six per cent.

The bank sees inflation around almost every corner, both here and abroad.

Wages are on the move, petrol prices are feeding into higher costs for producers, the
economy is operating as close to capacity as physically possible, and the deflationary
impact of the strong dollar has worn off.

Beyond the continent's shores, inflation is also on the move in other countries (as
are interest rates) on the back of a strong global economy.

Some homeowners are betting the bank, having lifted interest rates twice this year,
won't do it again because of the damage that might cause.

That's like betting on Carlton to make this year's AFL grand final.

Competition among lenders has meant that if you shop around, finding a rate below the
standard variable rate of 7.8 per cent is not too hard. For instance, online and phone
mortgage provider one direct (one direct) plans to offer 6.71 per cent until at least
January.

That means that an official interest rate of six per cent isn't having the same impact
it would if there wasn't so much competition.

In other words, the bank thinks it can lift rates higher without causing too much more pain.

Reserve Bank governor Ian Macfarlane, who retires next month, has used his last statement
on monetary policy to give a wake-up call to both Prime Minister John Howard and Treasurer
Peter Costello.

The shortage of skilled workers continues to hurt. Consumers just don't seem to get
the message that having debt does have repercussions.

And the July 1 tax cuts get their own special mention; but for the wrong reasons.

The government, and plenty of economists, have argued that high petrol prices have
acted as a de facto interest rate rise, curbing the spending powers of shoppers.

But the bank has found that, together with low unemployment, those tax cuts allowed
shoppers to keep hitting the malls.

With inflation likely to be at the top of the Reserve Bank's target range well into
next year, it means an interest rate rise is a good chance in coming months.

November looms as the month of choice. The bank board will meet a week after the latest
inflation figures. Those figures will confirm if homeowners are to get a pre-Christmas
interest rate dose.

And that will certainly be a big problem for about 8.7 million Australians.

AAP sw/sb/sp

KEYWORD: ECONOMY (AAP ANALYSIS)

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