US wobbles underline Australian rate risk: Economy roundup

Talk of trouble at two of the US’s biggest mortgage lenders, the Government backed Freddie Mac and Fannie Mae businesses, highlights that the global credit squeeze is far from over.

Talk of trouble at two of the US’s biggest mortgage lenders, the Government backed Freddie Mac and Fannie Mae businesses, highlights that the global credit squeeze is far from over.

The two mortgage lenders either own or guarantee about half of all outstanding home loans in the US, worth a whopping $US5.2 trillion.

The current concerns about the Fanny Mae and Freddie Mac businesses follows the announcement by another US mortgage lender, IndyMac, that it will cut jobs and stop offering many home loan products.

The share prices of both have lost close to 80% of their value over the past year, with falls of around 20% in recent days.

Needless to say, any serious problems at the two firms – never mind the unthinkable; a collapse – would send a tsunami through the global credit system.

In Australia, the direct consequence of that kind of event is likely to be more bank-initiated rate rises. As if to underline the ongoing risk, the Commonwealth Bank today announced a 14 basis point rise in its variable home loan rate to 9.58%, effective from 14 July.

And, of course, that might not be the only source of interest rate pressure. In a new report on the Australian economy, the International Monetary Fund has warned that inflation presents “a significant challenge”.

“With risks to inflation on the upside, the RBA should be prepared to tighten quickly if leading indicators suggest that domestic demand will not slow as expected or the outlook for inflation deteriorates,” the IMF says.

On the markets today, an early 50 point rise was followed by an equally rapid fall to leave the S&P/ASX200 up just 0.2% on yesterdays close to 4945.6 at 12.20pm.

And rising oil prices and the new talk of inflation has helped push the Australian dollar up to US96.05c at 12.20pm.