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Mortgage rates now at average levels
Over the past decade, the RBA would need to have pushed the cash rate up to about 5.5% in order for the average mortgage rate to be just over 7% and yet, with the cash rate at just 4.5%, most mortgages are at their long-term average levels.
Brokers will hope that this will be enough to keep the RBA from inflicting further pain on mortgage holders and deterring potential clients from purchasing new properties but ANZ chief economist Warren Hogan says that the cash rate still hasn't reached the 'neutral' setting that the central bank is aiming for.
"Although actual interest rates in the economy are near average levels, we do not think monetary policy is set to neutral," Hogan said. "The emergence of commodity boom mark II, high rates of immigration (labour force growth) and high rates of capital formation all suggest that a neutral interest rate for the economy is higher."
Hogan concedes that the neutral rate is "probably not much higher" but expects the RBA to lift rates by at least another 50 basis points before it reaches its desired setting.
"Strong housing markets, high consumer confidence and rising credit growth are all consistent with the view that monetary policy is still stimulatory to the economy," he said. "Despite this we expect the RBA to sit back and observe how the economy plays out for a few months."
Hogan said that the RBA is unlikely to raise rates every time it meets unless there are persistent upward revisions to the economic outlook. However, Hogan believes that is unlikely and is predicting that more mixed economic data will emerge over the months ahead as the impact of the first six rate hikes bite.
"Unless we see a fundamental shift in direction for China and commodity markets, the RBA will need to keep lifting rates," he said. "We expect two further rate increases in the third quarter. This will get the cash rate to 5% by September and 5.25% by the end of the year."
The bad news doesn't stop there. Hogan believes that rates will likely need to be restrictive, rather than neutral, later this year or early next year if the commodity boom plays out in a similar fashion to last time and is sustained. If that is the case, he expects the cash rate to peak at 6% in 2011 - pushing mortgage rates about 8.5% if lenders move in lock-step with the RBA.
"The RBA can't afford to let inflation get away from them at present," Hogan said. "High and rising house prices and household debt combine with a pre-dominance of floating rate mortgages to make Australia particularly susceptible to an inflation/interest rate surge."
By acting early and decisively, the RBA can avoid the need for further rate pain down the track. This is something that was not realised during the last commodity boom, Hogan said, but the latest action taken by the RBA shows that they are prepared to act early this time around.
By Luke Cornish | 05 May 2010
Source: Broker news
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