Mortgage rates may hit 8 per cent

At this stage a third 0.25 per cent rate increase in official interest rates is the most likely outcome the next time the RBA meets in early February. This would mean a total of 0.75 percentage points within four months. There is also a growing possibility that rates may well move higher during 2004 than the forecast 1 per cent overall rise, pushing the standard variable bank rate above 8 per cent.

But it is too soon yet to make that call. A February rise depends on the strength of economic data from both here and overseas over the next seven weeks. And by that time, the extra piece of crucial information the RBA will have is what reaction there has been among consumers, property investors and businesses to the first rate rise in November. If, as is hoped, current high household debt levels mean each small rate rise has a bigger impact than normal on household behaviour, then the tightening cycle might still be restricted.

The RBA statement announcing the rate rise pointed to the ongoing improvement in the world economy, strong economic performance at home and accelerating levels of consumer borrowing as the reasons for lifting rates again. The RBA said that despite the first interest rate rise, rates remained stimulatory when they no longer need to be. At the same time, housing approvals and retail trade saw solid increases for October. The 0.5 per cent total lift so far still leaves interest rates below neutral levels when arguably they should now be at restrictive levels. Hence the RBA's decision to move quickly.

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