RBA hints at further rate rates

The Reserve Bank lifted official interest rates by 0.25 percentage points in August as expected this week, but as the rise begins to flow through to variable mortgage and business loan rates, the big question now is whether or not borrowers can expect further hikes. The latest quarterly monetary policy statement released by the RBA on Friday suggests that further rate rises this year or early next could well be in the offing. The RBA says inflationary pressure has increased more than it had predicted and has now raised its forecast for underlying inflation over the rest of this year and next to 3 per cent, right at the top of the target band. It says it expects headline inflation to remain well above 3 per cent for much of that time. A strong world economy, especially Asia, and rising global inflation combine with very healthy economic conditions in Australia, which the RBA expects to continue, the quarterly statement says: "While rising fuel costs may be having a dampening effect on discretionary spending, the tax cuts that came into effect in July, coupled with growing employment, will boost household incomes and should add to spending in the second half of the year." Knowing how keen the RBA is to keep a lid on inflation above all else, you can be sure this means it will keep its finger on the rates trigger for some time and won't baulk at lifting rates again. But higher rates are not a forgone conclusion. With the impact of two rate rise now to work through the economy and predictions that world growth will slow next year, we may yet escape further rises over the next six months or so, but don't bet a lot on it. The RBA also says it believes rates are still not that high, pointing to rising household and business borrowing in recent months as a danger sign. Even though the August rate rise has pushed the official cash rate to above the average of the 13 years, home and business borrowers are still paying below average interest rates because of greater competition shrinking lenders margins.