Rates are going up. But how fast?

Rates are going up, if not next week, not long after. 2002 will be a year of rising interest rates. Rather than focus on when that’s going to happen the real questions now are how much and how fast? The good news is there is no need to panic. Rates are unlikely to rise at the same speed they came down. Over the course of 2001, rates came down by 2 percentage points. Its unlikely they will go up 2 points over the next twelve months. If they are to go up next week, a 0.25 percentage point rise is the likely magnitude, given the RBA will still be waiting for the key March quarter inflation figure out on April 24. This may see the bank hold off for April. But such a rise would add about $25 a month to the average repayments on a 25-year, $150,000 loan. This is a modest increase but borrowers’ minds will now be focusing on how much rates can be expected to rise in total this year. RBA does not have to raise rates as much as it lowered them to have the desired impact on the economy. The 2-percentage point fall – from 8 to 6 per cent on the standard home loan - amounted to a 25 per cent fall in rates. A 2 per cent rise from 6 to 8 amounts to a 33 per cent rise in rates but more importantly a 20 per cent rise in repayments – or $200 a month. The rise in home borrowing debt as first home buyers flooded into the market last year means many borrowers will be quite sensitive to rate rises – many will already be extended financially, and would have to rein in spending quite quickly. Add to that the rapidly increasing levels of personal debt, especially on credit cards, and it seems rates won’t have to go up too much. Continued productivity gains also suggest we can tolerate higher economic growth and lower interest rates without fuelling inflation. It will all depend on how strongly the economy performs this year into 2003, and how inflation responds. But at this stage it quite possible that standard variable rates will only reach 7 to 7.5 per cent in 2003. Beyond that, who knows. But the flattening of the interest rate cycle over the last decade suggests the next peak, whenever it is, will not see 10 per cent home loan rates.