Likely rate rise will hit home owners

The Reserve Bank of Australia is almost certain to lift interest rates tomorrow, despite fears that the ailing US economy could lead to a slowdown in global economic growth.

A strong 0.3% rise in TD Securities-Melbourne Institute inflation gauge for January – resulting in a 3.9% annual rise, the second highest rate in the gauge’s history – has reinforced the market consensus that the RBA will announce a 0.25% rate increase at 2.30pm tomorrow.

A Bloomberg survey of economists found widespread agreement that rates will rise tomorrow, with only three out of 27 economists believing there won’t be any move.

TD Securities senior strategist Joshua Williamson says last month’s high CPI result, continuing strong domestic demand and the resurgence in the sharemarket late last week, all point to a rate rise tomorrow.

Williamson rejects the view that it would be better for the RBA to wait and see if the international credit crunch will have a negative effect on the Australian economy.

“If the RBA waited, inflationary pressures would get worse and the RBA would come in for criticism that it is behind the curve, so the sooner it acts the sooner it can start filtering its way through the economy,” he says.

St George Bank head of economic research Steven Milch agrees that the RBA is likely to lift rates tomorrow, but unlike Williamson he believes there is much to be said for the “wait and see” argument.

“It has a lot of credence to it. In a longer term sense it doesn’t matter that much whether rates go up in February or March, and it would mean they would have more information about the impact of recent events on the economy to guide,” Milch says.

Whatever the reasoning, there can be no question a rate rise tomorrow will be painful for Australia’s homeowners.

Close to 750,000 homeowners will suffer mortgage stress in the year ahead, according to The Australian Mortgage Industry Report by JP Morgan and Fujitsu Consulting.

Increased mortgage repayments could mean as many as 300,000 people will default on their home loans, the report says, especially in outer suburbs of Melbourne and Sydney.