RBA raises Interest Rates – .25%
At its monthly board meeting the Reserve Bank of Australia has taken the world leading step of raising interest rates in response to strengthing economic conditions.
After the dramatic rate cuts of the last year in response to conditions caused by the Global Financial Crisi, Australia is the first developed nation to raise rates.
”Economic conditions in Australia have been stronger than expected and measures of confidence have recovered,” Glenn Stevens, governor of the RBA said in a statement accompanying the rate increase. ”[The] basis for such a low interest rate setting has now passed,” he said.
”I think it’s pretty clear that (the RBA is) increasingly comfortable that growth outlook appears durable,” said RBC Capital Markets economist Su-Lin Ong.
”They talk about a return to close-to-trend growth in the year ahead so obviously Australia is proving resilient throughout all of this.”
The Australian dollar jumped on the rate news, adding more than three-quarters of a US cent to 88.45 US cents, nearing 14 month highs – before easing back slightly. Stocks, though, fell, trimming the day’s gains.
The RBA’s decision has been driven by strong retail sales, rising consumer confidence and a rebound on share markets worldwide, which are up 50 per cent in Australia alone since March.
”The global economy is resuming growth,” Mr Stevens said. ”With economic policy settings likely to remain expansionary for some time, the recovery will likely continue during 2010 and forecasts are being revised higher.”
While the expansion is likely to be ”modest” for many rich nations, ”[p]rospects for Australia’s Asian trading partners appear to be noticeably better,” Mr Stevens said. ”Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets.”
The central bank does not want the economy’s overall health to be threatened by underlying inflation or unsustainable borrowing activity, which can be triggered by low rates.
Despite the positive economic signs, the job market remains weak, with the unemployment rate, currently at 5.8 per cent, expected to have hit 6 per cent in September when new data is revealed on Thursday.
Mike Nicholls from MortgageCorp believes that there is more rate rises to come before Christmas. “Certainly all the data is pointing towards an economy that is growing, albeit with higher unemployment and the RBA is keen to keep a lid on the inflation that will result and unfortuantly this means higher mortgage payments for borrowers.
The best time to lock in fixed rates was about 6 months ago, however there are a number of options for the borrower looking to lock in a rate whilst keeping the advantages of a variable rate. Bankwest’s new Capped Rate Variable Home Loan where the loan runs at a variable rate but is capped at a top rate of interest 7.5% (comparison 7.65%).
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