Rates rise, with more to come

The Reserve Bank raised official interest rates 0.25 percentage points to 4.75 percent this week as latest economic indicators confirm we are now locked in to the upward cycle for interest rates.

This week’s March quarter GDP figure of 0.9 percent makes for annual economic growth of 4.2 percent. Together with resilient building approval figures and a rise in full time jobs on top of rising numbers looking for work mean that, despite this week’s rise, more rises are on the way and sooner rather than later.

The official rise will flow through to all variable home loan rates as a matter of course over the next week or so with standard rates rising to 6.57 percent.

More interesting will be what happens to credit card rates. Card rates did not fall by the full 2 percentage points of official reductions last year but are showing signs of matching this year’s rises in full, amounting to an increase in credit card margins for the banks.

Home loan rates are now expected to rise between one and two percentage points over the next year. Just how much they do rise will depend on how strongly the Australian economy continues to perform and to what degree this translates into inflationary pressures.

With inflation already at the top end of the RBA’s target range of 2 to 3 percent, a healthy domestic economy, and growing signs of a synchronised world recovery, the balance of economic risks to Australia are now firmly skewed towards overheating.

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