Mortgage holders should brace for further interest rate rises because the Reserve Bank of Australia (RBA) looks increasingly likely to follow up last week’s hike, economists say.
The RBA’s decision to lift the cash rate to 3.25 per cent, from 3.0 per cent, heralds the beginning of a series of rate hike over the next two years, according to an AAP survey of 17 economists.
All those surveyed expected the central bank to deliver another 25 basis point increase between now and Christmas.
And four – Citi, National Australia Bank, 4Cast and RBC Capital Markets – say rates will rise in both November and December as the central bank returns interest rates to more normal levels as the economy picks up.
The survey’s median cash rate forecast for the end of June 2010 was 4.25 per cent.
Any cash rate move is expected to be fully passed on by the major retail banks.
There was less agreement among those surveyed on the pace and size of interest rate movements for 2010 and beyond.
But most of the economists expect the cash rate to rise – but remain low enough to continue to support the economy until the end of next year.
AMP Capital Investors senior economist Bob Cunneen says it is no longer necessary to have official interest rates at near 50-year lows.
“The Reserve Bank is moving from a very accommodative monetary stance because in its view on the Australian economy, the recession has ended and it is recovering back towards trend and potential growth,” Mr Cunneen said.
RBA governor Glenn Stevens said in a statement after last Tuesday’s decision that the risk of a serious economic contraction had now passed.
“The board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy,” Mr Stevens said.
Moreover, Mr Stevens said growth was “likely to be close to trend over the year ahead”.
ICAP senior economist Adam Carr said the Australian economy was looking healthy.
“I think that there are very few headwinds for the Australian economy at the moment and they are pretty much all global,” Mr Carr said.
The RBA was the first central bank among the Group of 20 nations (G20) to start moving interest rates north following the global financial crisis.
Surveys have shown that business and consumer sentiment were especially sensitive to interest rate movements, particularly upwards changes, which generally prompt pessimism.
But Commonwealth Bank of Australia economist James McIntyre does not expect this rate hike cycle to evoke the standard reaction.
“This interest rate rise and the next few one that we are likely to get, it could actually have the reverse effect, in a sense that it is signalling that the emergency is over,” Mr McIntyre said.
“The RBA coming out and having a bullish and an optimistic take on the economy could be something that, contrary to normal responses, could actually see consumers become a bit more optimistic.”
Federal Treasurer Wayne Swan said rising interest rates made it tougher for mortgagors, but were an indication that the nation was emerging from a period of weakness.
“Clearly, commonsense will tell you that as the economy begins to recover, the Reserve Bank will exercise its independence and move rates accordingly,” Mr Swan said last Tuesday after the RBA decision.
One factor helping keep the mood buoyant has been the recent flow of positive economic data, particularly figures published on Thursday which showed the nation gained 40,600 jobs in September and the unemployment rate fell to 5.7 per cent.