Rate rise on the horizon

A rise in home loan interest rates is not imminent but may not be too far off. That's the bottom line in a warning speech from Reserve Bank governor Glenn Stevens in Brisbane this week. Like most economic analysts and commentators, Stevens admitted that the RBA is surprised by the ability of the Australian economy to grow strongly in recent years without setting off inflation. Wages have stayed within manageable limits while the latest CPI figures showed inflation settling back nicely after approaching danger levels last year. But all this comes at a time when the economy is expanding rapidly, a rate of 4 to 5 per cent per annum currently, and Stevens was at pains to say this can't last. "If strong demand growth were to persist, risks on the inflation side will grow", he warned. The RBA forecasts inflation to pick up next year but Stevens has made it clear it will want to pre-empt any inflation breakout with early action. There is "cause enough to err on the cautious side in setting policy, and to ask whether the current settings are restrictive enough", he said. But the recent drop in inflation has, says Stevens, given the RBA "a bit of extra time" in which to assess the risks and take any interest rate action. That suggests that borrowers should be spared a rate rise for at least the next month or two and probably longer. The soonest a rate rise could be expected is in early August after the release of this quarter's CPI result, but inflation signs are more likely to emerge beyond the current quarter putting a greater likelihood of a rate rise in November or early in 2008. Any rise in official interest rates by the RBA would quickly flow through to variable home and business loan interest rates. Rates almost always rise in 0.25 percentage point increments, which add around $17 a month to repayments for every $100,000 of borrowings.