Boom times signal interest rate rise is on the way

16 August 2004

Borrowers have been warned by the Reserve Bank to expect higher interest rates, with experts tipping rises could come soon after the looming federal election.

In an unusually blunt assessment, the Reserve's quarterly economic report card, released yesterday, said "it would be surprising if Australian interest rates did not have to increase further".

It said the economy was expanding at a good pace and the strong world economy would provide a further boost to growth by helping drive an overdue export recovery.

The Reserve also linked the Government's big-spending May budget, especially the family payments and tax cuts, to its interest rates assessment, saying this largesse would accelerate consumer spending. Budget policies were "likely to be expansionary" for the economy this financial year.

Some economists say the Reserve Bank could opt for a 0.25 percentage point rate rise on Melbourne Cup day, November 2, followed by a similar increase on December 7.

The Reserve lifted rates in November and December last year, but has left its official cash rate unchanged at 5.25 per cent ever since.

Despite yesterday's rates warning, it said the housing market was no longer "overheated" - a view supported by a 4.7 per cent drop in the value of home loans in June.

The Bureau of Statistics figures, also out yesterday, showed the value of loans for owner-occupied homes fell by 2.4 per cent while investment housing loans slid 8.8 per cent.

But the bank said that debt was still accumulating too quickly.

The Reserve's candour on the future of interest rates took economists by surprise. Westpac's chief economist, Bill Evans, said the statement was the strongest he could recall.

CommSec economist Craig James said the Reserve "couldn't have been more transparent in discussing interest rates if it tried".

"We have moved our rate rise call to December," said Commonwealth Bank chief economist Michael Blythe. "The risk is that rates may have to move higher again in 2005."

The shadow treasurer, Simon Crean, said the Reserve's statement signalled more financial stress for families. "With fees and charges rising, skills shortages looming, petrol prices high, and the Howard Government on a record pre-election spending spree, the Reserve Bank has given its clearest indication that interest rates are likely to rise further," he said.

But the Treasurer, Peter Costello, attacked Labor's economic credentials. "The economy is poised at a very delicate position and the Australian economy cannot afford mismanagement."