PETER MARTIN ECONOMICS CORRESPONDENT

MORTGAGE holders can breathe a guarded sigh of relief after the first official rate rise of the year. Each of the lenders that has responded has passed on no more than the Reserve Bank’s 0.25 percentage point increase.

But each has also complained about ”cost pressures” and hinted it would not be able to continue to hold the line. 

Calculated on the average interest rate of the four major banks before yesterday’s increase.

After imposing an outsized increase of 0.37 of a percentage point increase when the Reserve last lifted rates in December, the Commonwealth Bank this time kept its increase to 0.25 of a percentage point but warned it ”continues to experience increases in wholesale funding costs”.

The ANZ, which pushed up rates 0.35 points last time , fell in line with the Reserve Bank but warned it was ”continuing to absorb additional funding costs” to balance ”very real commercial pressures with the interests of our customers and the broader community’s interest in the economic recovery”.

St George, owned by Westpac which in December led the pack with a 0.45 point increase, said it would only push up rates 0.25 points to take ”a responsible approach to managing interest rates and funding cost pressures”.

Even the National Australia Bank, which was the only one last time to hold its increase to 0.25 points, said this time it would need to examine the ”cost of providing funds” before deciding.

Within minutes of the Reserve’s announcement, the Treasurer, Wayne Swan, sent a message to the banks that there was ”absolutely no justification whatsoever for any increase over and above the official cash rate increase”.

”If we look at the net interest margins for the major banks, they have improved to pre-crisis levels,” he told a Parliament House press conference. ”I have made my views very clear about what Westpac did last time – it was not justified and they thoroughly deserved the backlash they subsequently suffered.”

The latest increases make ANZ the most expensive bank with a standard variable mortgage rate of 6.91 per cent, and NAB the cheapest with a rate of just 6.74 per cent if it does no more than pass on the official increase. If Westpac passes on the increase in full, it will lead the pack with a standard variable rate of 7.01 per cent, and be the first bank to push its mortgage rate above 7 per cent.

Mr Swan said rates were still at ”1970s lows”. ”I think families and businesses understand that rates can’t stay at emergency levels forever, although for someone with a mortgage, it’s tough stumping up an extra $50 a month.”

The governor of the Reserve Bank, Glenn Stevens, described the rise as ”a further step” in the process of returning rates to average levels now that economic growth was likely ”close to trend”.

He has previously stated he expects two to four such rises this year.

The increase will add about $47 to the monthly cost of servicing a $300,000 mortgage, and $63 to a $400,000 mortgage.

Meanwhile, the Bureau of Agricultural and Resource Economics has forecast a 15 per cent increase in mineral and agricultural commodity exports, reaping $186.8 billion in 2010-11.

The drive in commodities exports comes on the back of surging demand from China and India for iron ore and coal.

with Tom Arup

PETER MARTIN

The Reserve Bank has produced the first public estimate of the number of times it expects to raise interest rates in the coming months.

Its governor, Glenn Stevens, told the Parliament’s economics committee yesterday he expects to do it between two and four more times.

Declaring the financial crisis over, and telling the committee it had only ever been a global crisis for six to eight weeks, Mr Stevens said the cash rate had to move away from its ”emergency settings” and increase by 0.5 to 1 percentage points so that consumer and business rates would return to their long-term average, ”which I think is the appropriate place to be”.

Another two to four rises of 0.25 points would add a further $95 to $190 to the monthly cost of servicing a $300,000 mortgage, but would, importantly, leave repayments several hundred dollars below where they were before the crisis began.

The future of rates beyond that would depend on the bank’s assessment of wage and inflationary pressures and the institutions with which borrowers had their accounts.

”We have really had 3½ rate moves so far, or if you are a customer of Westpac, four,” the governor told the committee.

Mr Stevens was relaxed about government debt, saying it was so low that on one reading of proposed new international banking standards Australia did not have enough government debt to sell the banks the safe securities they would need.

Asked to respond to a claim by the Coalition frontbencher Barnaby Joyce that Australia was at risk of defaulting on government debt, he said there were ”few things less likely than Australia defaulting”.

Reminded that Senator Joyce was the shadow finance minister, he said he had ”yet to meet a finance minister who has ever mused any possibility about debt default of his own country”.

Citizens Electoral Council of Australia sent us the followings:

Media Release  14^th of January 2010. To defeat the Money Power and guarantee Australia’s economic future:

Re-establish a true national bank

CHRIS ZAPPONE

No festive season gifts from the RBA as interest rates are boosted 25 basis points to 3.75 per cent.

Families that are feeling the pinch will need to tighten the purse strings even more, with the RBA topping up the rates before Christmas.

The Reserve Bank of Australia today raised the official interest rate by a quarter of a percentage point to take the cash rate to 3.75 per cent.

This is the first time that the central bank has increased rates for three consecutive months since rates were first announced by the RBA in 1990.

Don’t be fooled by the banks
Click here to keep an eye on who is offering the best home loan rates.

Economists were divided as to whether the RBA would raise rates. ANZ chief economist Warren Hogan says economic conditions are favourable despite the recent debt problems in Dubai.

“Despite the volatility in financial markets in the past week or so, the domestic economy is doing exceptionally well,” Mr Hogan said.

“All the economic data we’ve seen in the past month has not only reinforced that but probably been stronger than most were expecting.”

Mr Hogan says the troubles in Dubai which sparked losses on global sharemarkets are nothing to be too concerned about as the exposure to domestic markets appears minimal.

“It really is a short-term news-type event,” he said.

“The magnitude of the problems there, while significant, it’s really is nothing compared to what we went through a year ago.”

Has the RBA acted too quickly?
However, other economists have warned that the RBA’s rush to increase rates may be heavy-handed given the uncertainty surrounding the global economic recovery.

“This is a particularly fragile phase of the recovery where the Government and the Reserve Bank risk getting it wrong if the balance and timing of fiscal and monetary stimulus is not calibrated appropriately”, said Rod North, MD of Bourse Communications.

“Following the recent increases in the cash rate in October and November by 25 basis points and another increase today of a further 25 basis points, it is still too early in the cycle to begin an aggressive rate hike. More time is needed for recovery as part of the economic healing process”, he said.

“IT’S disgusting, isn’t it?”

Schoolteacher Catherine Sutton is standing where the extra bedroom should be when she delivers an assessment that neatly sums up how millions of homeowners will feel after the over-the-top rate rise by Westpac.

There is no extra bedroom or family room because the banks have taken them with their gouging.

“We have had to hold back on the renovations,” Mrs Sutton, 36, said.

“We count our pennies now, pay the mortgage and make sure the kids are fed.”

As children Lily, 8, and Charlie, 5, chase the family dogs around the backyard of their Orange home, their father Chris explains that it will be a tighter Christmas.

Courtesy of the banks.

“It limits us in terms of what we can do on holidays,” Mr Sutton, 37, said.

The Suttons, both schoolteachers, would like to switch lenders but the fees are too high and all the majors are as bad as each other anyway. “They’ve got you over a barrel,” Mr Sutton said.

Never mind the greediness of the big banks, the repeated rises from the Reserve are pain enough. “It makes it hard to get into a regular pattern of budgeting and saving,” Mr Sutton said.

Mortgage repayments are likely to push many recent homebuyers toward the brink in 2010 as rates rise beyond the expectations and budgets of many.

A Daily Telegraph survey of new entrants to the housing market – conducted before the central bank raised rates for an unprecedented third month in a row yesterday – has revealed many buyers under-estimated the extent of future RBA action.

Forty of the 100 property buyers surveyed said they expected official rates to rise by no more than 1 per cent by December next year.

Following yesterday’s 0.25 per cent increase, the survey suggests these buyers are budgeting for only three quarter-point moves in 2010. However, interest-rate futures predict as many as five more 0.25 per cent rises.

Perhaps of more concern is that even if rates do rise by just 1 per cent, more than half of the respondents said that repaying the mortgage would become a difficulty.

About 40 per cent admitted over spending their buying budget.

Nearly 90 per cent had anticipated the RBA would lift rates yesterday.

But only 17 per cent thought monetary policy action was warranted.

Close to two-thirds said the RBA was out of touch. And 90 per cent believed commercial lenders had the ability to offer better deals to borrowers.

RBA emergency rate level lifted 25 basis points to 3.25 per cent.

The Reserve Bank of Australia today raised the official interest rate from its lowest-ever point, amid signs of a strong local recovery.

The move is in stark contrast to last year, when the RBA joined the rest of the world in slashing interest rates to confront a rapidly escalating global financial meltdown.

The dramatic action saw the official cash rate plunge to a 49-year low of 3 per cent.

This marks the first rate rise since March last year.

How will the rate rise affect you?
We all feared a rate rise was on its way. We ask our finance expert how the lift will affect you.

Does this mean the ‘emergency’ is over? Last week’s better-than-expected retail sales figures from the ABS and yesterday, ANZ job advertisements rose 4.4 per cent in September.

Economists from JP Morgan and Macquarie Group predicted that the RBA board would approve a rate hike today.

Today’s interest rate rise could mean a back-to-back affair, with a follow-up in November on Melbourne Cup day.

Housing bubble

There have been reports that the RBA is primarily worried about a housing bubble and wants to increase rates to pull prices in. But not everyone agrees.

Stephen Koukoulas, chief global strategist at TD Securities, says RBA governor Glenn Stevens has a bee in his bonnet about housing.

He has written an open letter to the RBA board arguing against the rate hike.

Mr Koukoulas warned that premature action could risk a “double-dip recession”.

“When you look at things like full-time employment, you look at what’s happened to consumer spending now that the fiscal stimulus measures are starting to fade,” he said.

“And again you look at what’s happened to the export sector and the very overvalued Australian dollar.

“This interest rate hike could really run the risk of whether you call it a double-dip recession or a W shaped growth performance, there’s a real risk that the Australian economy could buckle under a premature tightening in policy.”

Treasurer Wayne Swan remains cautious about the economy.

“We know the global economy is fragile. That is why everybody needs to work together in this environment.”

HOMEOWNERS should prepare for rapid, multiple interest rate rises as the Reserve Bank “recalibrates” for a growing economy, its governor has warned.

Speaking at a breakfast function in Perth today, Mr Stevens said the period of greatest weakness in Australia was probably past and the risks of really serious economic weakness had abated.

In that environment, the central bank governor said monetary policy needed to be “recalibrated” to reflect the changing circumstances.

“If we were prepared to cut rates rapidly, to a very low level, in response to a threat but then were too timid to lessen that stimulus in a timely way when the threat had passed, we would have a bias in our monetary policy framework,” Mr Stevens said.

“Experience here and elsewhere counsels against that approach.”

The RBA board took the first step to returning interest rates towards what Mr Stevens described as more normal levels last week, when it lifted the cash rate to 3.25 per cent, from 3 per cent.

The RBA’s actions, along with government stimulus measures and the recovery in China had helped head off the worst effects of the global recession, Mr Stevens said.

“The very low interest rate settings were designed for a weaker economy than we are in fact facing,” Mr Stevens said.

“Plainly, the downside risks to which the board was responding earlier have not materialised.

“This is not a problem. In fact, it is a very desirable situation.”