John Howard warns - mortgage interest rates must rise

3 Jun 2002

Interest rates have to rise now the threat of an overseas recession has eased and the risk grows that the economy may overheat, John Howard said yesterday.

Following the warning by Reserve Bank of Australia governor Ian Macfarlane on Friday that bringing policy settings to a "neutral" level would push official rates up by 1.5 percentage points over the next 12 months, Mr Howard finally conceded that rates might have to go higher.

The RBA board meets on Tuesday, and market analysts believe the official interest rate will be lifted 0.25 percentage points to 4.75 per cent. That would push the standard variable home loan rate from 6.32 per cent to 6.57 per cent.

But the threat of retail housing rates rising to 8 per cent failed to douse the boom in city property clearances at the weekend.

Prices were hot, and weekend clearance rates in Sydney were above 80 per cent and were steady at 77 per cent in Melbourne.

Real estate agents reported strong auction turnouts, and said interest rates had failed to have an impact on the housing market.

"Interest rates are having no real impact. I really believe that the buyers factored in interest rate rises six months ago," said Bruce Bell of Melbourne's Collins Sims.

Rowan Webb, chief auctioneer for Di Jones Real Estate in Sydney, reported large crowds at weekend auctions, and said many buyers were also purchasing before auctions.

"We sold just about everything we had, and interest rates didn't have any impact on the market," he said.

Earlier this month, the Prime Minister argued the economy was well balanced and concern over household debt - raised as a significant future concern on Friday by Mr Macfarlane - was "needlessly negative".

But yesterday, Mr Howard said he understood the need for some increase in rates but he stressed rises should be more moderate than in previous rising cycles because inflation would likely remain under control.

"I think we have to expect, given that rates went down to such very low levels at a time when we were taking out some insurance against overseas recessionary influences, I think we have to expect that rates will go up a bit," he told the ABC Insiders program yesterday.