The Reserve Bank of Australia board has cut the official interest rate by 25 basis points to 4.25 per cent, giving mortgage holders and borrowers a pre-Christmas reprieve.

The RBA announced the rate cut at 2.30pm AEDT today following the board’s final meeting for the year.

It’s the second interest rate cut in as many months after the RBA lowered the cash rate on Melbourne Cup day in November.

In a statement issued with the announcement, RBA Governor Glenn Stevens said there had been "considerable turbulence" in financial markets and said financing conditions had become more difficult.

"This, together with precautionary behaviour by firms and households, means that the likelihood of a further material slowing in global growth has increased," Mr Stevens said in a statement accompanying the decision on Tuesday.

Economics analyst Ross Greenwood said Europe’s debt crisis would have been a significant factor in the RBA’s decision.

"The Reserve Bank indicated that it is still concerned about the European economic situation and the prospects of a global slowdown hurting Australia and its export markets," Greenwood told ninemsn.

While it’s good news for mortgage holders and borrowers, Greenwood cautioned consumers not to expect the banks to pass on the full interest rate.

Analysts were divided about whether the RBA would cut the rate today, with a survey of 14 economists conducted by AAP revealing seven tipping a cut, and seven predicting rates would stay on hold for another month.

Story source: www.ninemsn.com.au

Economists are divided on whether borrowers will get a second interest rate cut in as many months on Tuesday.

Seven of the 14 economists surveyed by AAP say the RBA will cut the cash rate to 4.25 per cent from 4.5 per cent on December 6.

On Melbourne Cup day, the Reserve Bank of Australia (RBA) cut the cash rate from 4.75 per cent, saying that recent information suggested inflation had been contained.

With inflation no longer a problem, the bias for the RBA is now firmly leaning towards rate cuts, with 10 of the 14 economists forecasting rate cuts by the middle of 2012.

Citigroup head of economics Paul Brennan is expecting the RBA to cut rates on Tuesday, despite expectations of strong economic growth in the September quarter.

"We see this as a policy of least regret given that the outlook for global growth has continued to weaken in the past month to well below trend," Mr Brennan said.

"We see scope to lower the cash rate to the bottom of the neutral range over the next few months, which would imply a cash rate of four per cent over the next three months."

The biggest risk to economic growth comes from Europe, which may well go into recession, or start another financial crisis, as several members of the euro struggle to meet debt repayments.

There are also local risks to economic growth.

In the past month the RBA, Treasury and the Organisation for Economic Co-operation and Development (OECD) have cut economic growth forecasts for 2012.

In addition to that, official figures for October showed a 10.7 per cent fall in building approvals and retail spending only rising 0.2 per cent.

On the other hand Australia’s mining boom is still going strong, with the sector making its biggest ever contribution to economic growth.

Nomura Australia chief economist Stephen Roberts said he doesn’t expect the cash rate to move for the foreseeable future unless something bad happens overseas.

"My forecast is that they are going to leave it at 4.5 per cent," he said.

"I’m assuming they will hold it neutral all the way through to the end of 2012 but my proviso is if Europe generally does go to hell in a handbasket, then they can drop interest rates a long way."

NAB senior economist Spiros Papadopoulos said the RBA won’t cut on Tuesday but by early next year the pressure will build for another rate cut.

"Obviously there’s a risk that they might cut interest rates next week, given everything that’s been happening offshore in the last couple of weeks," he said.

"On balance, given the fact that the domestic economy has been holding up okay we don’t think they need to rush in to cutting rates."

Story source: www.ninemsn.com.au

With the Reserve Bank serving up a rate cut, it’s a smart move to keep your repayments at the same level. Many lenders don’t automatically reduce your repayments when rates fall.

That doesn’t mean, of course, that you’re not getting a cut in interest rates – just that your weekly or fortnightly (or monthly, but don’t pay monthly, it will cost you more in the long run, as explained below) repayments stay the same.

That’s smart because automatically you’re paying an extra $45-$60 (or whatever it equates to on your mortgage) a month, which will see you get out of the debt-jail sooner.

And with house prices stagnant or falling, the one smart way to make money out of your property is pay it off more quickly and reduce the overall cost of acquiring it.

It has, of course, always been the best way to do things. Ask any pre-baby boomer and they will tell you that.

But in the heady debt-fuelled days of recent past it seemed too easy that you could buy a place, sit it out, burn up the redraw facility on the loan on cars, clothes and overseas holidays, and still double your money in a decade. However, after such big run-ups in house prices, everything has softened and we’re not likely to see similar increases in home prices anytime soon.

Not that a slowing housing market is necessarily bad – despite the general pall it throws over things. Investors may want those days to return but most people can see that steady prices are a lot healthier.

Houses, after all, are primarily for living in. There are other money-making vehicles out there that don’t put the cost of basic shelter out of the average person’s reach.

And the slowing housing market also – in part – took the pressure off the Reserve Bank to keep hiking rates after last year’s Melbourne Cup.

When it comes to the cost of acquiring a home, you can do it the expensive way – borrowing the money (as most of us have to do), or the really, really expensive way (borrowing money and taking forever to pay it off).

The Figures

Let’s assume you’re paying 7 per cent on your mortgage now and you’ve borrowed $500,000 to buy your place. Pay it off monthly over 25 years and you’ll fork out a total of about $1,060,147.

Add another $60 a month to your repayments and you’ll be up for a total over the life of the loan of $1,031,230, saving $28,918.

Pay down an extra $200 a month, or about $50 a week, and suddenly you’re up for a six-figure total instead of a seven, of about $975,321. You’ll also save an impressive $84,842. And you’ll walk away from the shackles of that mortgage more than three years earlier.

Of course your mortgage might not be $500,000, so to find out how it works in your situation check out some of the online calculators such as this. It’s worth bookmarking the site and going back to it every time you need a bit of motivation to pay down the mortgage faster.

And another trick – now well known by many – is to pay fortnightly and not monthly. You’ll end up thousands of dollars ahead by taking advantage of the fact there’s 12 months in the year, but 26 fortnights, meaning you make one fortnight’s repayment more per year than you would if you were paying monthly.

Story by Carolyn Boyd www.domain.com.au

Australia’s biggest home lenders cut mortgage rates soon after the central bank reduced the cash rate for the first time since April 2009.

Westpac took just 15 minutes to pass on the Reserve Bank of Australia’s (RBA) 0.25 percentage point rate cut in full on Tuesday. It will lower its standard variable home loan rate (SVR) to 7.61 per cent from November 14.

Westpac is the nation’s second biggest mortgage lender by market share,

Bank of Queensland (BOQ), and Commonwealth Bank (CBA), Australia’s biggest home lender, followed suit, cutting their SVR to 7.61 per cent and 7.56 per cent respectively.

BOQ’s rate cut will take effect on November 11, and CBA’s on November 4.

ANZ Banking Group and National Australia Bank (NAB) said their interest rates were under review.

The cuts by the bigger Sydney-headquartered lenders come almost two years after Westpac ignited public outrage by lifting its SVR by 45 basis points after the RBA’s rate hike of 25 basis points.

Last November CBA did the same, with its rivals passing on rate rises of between 35 and 43 basis points, helping to prompt a Senate inquiry into competition within the banking sector.

NAB has consistently tried to undercut its rivals to win market share, and last Thursday posted a record annual cash profit of $5.5 billion on strong growth in home lending and deposits.

Westpac retail and business banking group executive Rob Coombe said economic weakness in Europe was having a negative effect on Australian business and consumer confidence.

"A reduction in interest rates will provide a timely boost to sentiment and generate a positive flow-on effect for the broader Australian economy," he said in a statement.

The rate cut will reduce repayments on an average $250,000 mortgage by about $41 per month, he said.

BOQ managing director Stuart Grimshaw announced the rate cut on his first day with the bank as its new boss, saying that with Christmas approaching it was the right thing to do.

CBA has 27.8 per cent of Australia’s home loan market.

Westpac has a 26.4 per cent share, while NAB has 15.6 per cent, ANZ 14.3 per cent, Suncorp 2.8 per cent, Bendigo and Adelaide Bank 2.6 per cent and BOQ 2.2 per cent according to figures from the banking regulator.

Westpac will report its annual result on Wednesday followed by ANZ’s profit result on Thursday.

Story source: www.ninemsn.com.au

Homeowners have been granted a long awaited reprieve, with the Reserve Bank opting to drop interest rates by 25 basis points.

The cut continues what is becoming a tradition, with the Reserve Bank changing the cash rate on Melbourne Cup Day for the sixth year in a row.

It is also the first time in a year that rates have shifted in either direction, with last year’s race tarnished by a surprise 25 basis point bump.

The Reserve Bank’s decision comes after the TD Securities-Melbourne Institute data revealed inflationary pressure was at a 19-month low.

The Institute’s inflation gauge showed a 0.1 percent rise in headline and trimmed mean measures, prompted largely by a massive drop in fruit and vegetable prices.

The rise keeps inflation at a 19-month low of 2.6 percent, well within the Reserve Bank’s target band.

The Reserve Bank last cut interest rates in April 2009. Following a steady climb in 2010, interest rates have stayed on hold since last November.

The last time the Reserve Bank stayed put on Melbourne Cup day was in 2005, midway through the cash rate’s year-long stint at 5.5 percent.

Story source: www.ninemsn.com.au

The central bank has decided to keep the cash rate unchanged this month and has opened the door for possible future cuts.

The decision was expected, with all 15 economists surveyed last week by AAP predicting the Reserve Bank of Australia (RBA) would keep rates on hold at 4.75 per cent on Tuesday.

The central bank’s board last raised the rate from 4.5 per cent in November 2010.

But the focus was on the statement accompanying the decision, in which RBA Governor Glenn Stevens indicated he was less concerned that inflation would accelerate.

"The path for inflation may now be more consistent with the two to three per cent target in 2012 and 2013," he said.

That meant rate cuts were now on the table.

"An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary," Mr Stevens said.

UBS interest rate strategist Matthew Johnson said the RBA appeared to have downgraded its growth and inflation forecasts.

"I think that the bank has gone from thinking that things were too strong a couple of months ago, to being around trend now," Mr Johnson said.

"If there’s a further deteriorating, they’ll ease policy."

He said the statement prompted investors to buy bonds, on expectations that the central bank may soon cut the cash rate.

The December 10-year bond futures contract rose to 95.985 (implying a yield of 4.015 per cent) from 95.96 (4.04 per cent) just before the RBA released its statement at 1430 AEDT.

The Australian dollar dropped to a one-year low 94.65 cents after the statement.

Mr Johnson said Mr Stevens’ statement suggested the bank would be watching unemployment figures very closely, as a gauge of inflationary pressure on the economy.

"But we’re a few months away from having to make that decision."

Mr Stevens said conditions in global financial markets continued to be "very unsettled, with uncertainty increasing about both the prospects for resolution of the sovereign debt and banking problems in Europe, and the outlook for global economic growth."

However, economic activity in China and Asia was continuing to expand, he said.

CommSec chief economist Craig James said Mr Stevens’ statement showed the RBA had become more open to the possibility of lower rates.

"For the first time since the global financial crisis, the Reserve Bank has opened the possibility of rates being trimmed to support the economy," Mr James said.

He said the focus now shifts to October 26, when the Australian Bureau of Statistics releases consumer price index (CPI) data for the September quarter.

The CPI is a key measure of inflation and is used by the central bank in setting its monetary policy.

HSBC chief economist Paul Bloxham said the RBA’s statement was more dovish than recent ones.

"The RBA is keeping a steady hand on the wheel and is more concerned with the inflation outlook," he said.

Mr Bloxham noted that while the European and US economies were slowing, Asia, and particularly China, were going strong or, at least, easing at a steady rate.

Story source: www.ninemsn.com.au

A FRESH round is likely to begin in the mortgage price war with Commonwealth Bank pledging to beat any advertised rate among its three big rivals.

The pledge has hallmarks of the ”unbeatable” campaign launched by National Australia Bank in New Zealand, a move that spurred on home lending but crunched margins among banks.

The move has been timed with the spring sale season, traditionally the most active period in the Australian housing market.

Intense competition has already emerged among banks across fixed rate loans, with some starting to price fixed rates lower than variable rates.

But CBA’s push extends to both fixed and variable rates and will remain in place until the end of September. The move is expected to draw a swift response from rivals National Australia Bank, ANZ and Westpac.

CBA’s executive general manager of retail products, Michael Cant, said the move was aimed at providing borrowers with competitive home loan deals.

”Our guarantee to beat our major competitors means we’re putting our money where our mouth is,” Mr Cant said.

Sluggish global economic growth, worsening debt market problems, as well as doubts about the Australian outlook have sparked predictions of cuts to official cash rates.

Source: www.domain.com.au

The Reserve Bank has decided to keep interest rates on hold, despite fears of the Australian economy struggling outside the mining sector.

With instability in the European markets and concerns over a double-dip recession in the US, the RBA decided to keep official interest rates at 4.75 percent.

RateCity CEO Damian Smith said the decision to keep rates on hold is good news for homeowners and prospective buyers.

"With the number of property sales and mortgages plummeting this year, keeping the cash rate unchanged should give some confidence to both groups," Mr Smith said.

"It’s important that current borrowers use any rate pause wisely – paying down debt by increasing your monthly repayments is a tried and tested formula.

"For those about to enter the property market, having the highest possible deposit saved will help you reduce the impact of any future rate rises."

The Reserve Bank last raised rates by 25 basis points in November 2010.

Source: www.ninemsn.com.au

The Reserve Bank of Australia (RBA) has spared borrowers an interest rate rise, leaving the cash rate at 4.75 percent in a widely expected move.

The Reserve Bank last increased the overnight cash rate in November 2010 to 4.75 percent from 4.5 percent and most economists still expect a rate rise this year.

“We expect that the Reserve Bank’s decision to leave the official cash rate unchanged at 4.75% today will fuel a new trend emerging where we’re starting to see Australians saving less and borrowing more money for home loans," RateCity chief executive Damian Smith said.

Prior to the announcement the Australian Chamber of Commerce and Industry warned that an official interest rate rise today would "punch a hole" in business and consumer confidence. The chamber’s latest expectations survey, released on Monday, again highlighted the pressures businesses are facing, it said.

"We are particularly concerned about a pre-emptive rate increase, or an early increase," the chamber’s director of economics and industry policy Greg Evans told reporters in Canberra.

"That that could be very damaging and punch a hole in both business and consumer confidence."

The head of the Bank of Queensland has warned that Queensland’s economy is at its weakest level in the past five years due to falling tourism and deflated real estate values, and that any additional interest rate hike would only serve to cause more damage, according to a report by The Australian.

David Liddy added that the strength of the mining and manufacturing sectors is overshadowing significant weak points elsewhere in the economy, and joined business leaders in expressing concern over the possibility of an interest rate hike by the Reserve Bank of Australia in its determination to cap inflation.

The concern expressed by Mr Liddy and business leaders at Monday’s Australian Agenda event came on the heels of the release of minutes from the RBA’s May board meeting, where board members suggested that higher interest rates may be necessary to fight inflation.

Speculation suggested a rate hike could come as early as the RBA’s next board meeting, which occurs in two weeks, according to The Australian.

The Reserve Bank of Australia unexpectedly increased its benchmark interest rate on concern stronger growth will cause inflation to accelerate, driving the nation’s currency toward parity with the U.S. dollar.

Governor Glenn Stevens raised the overnight cash rate target a quarter point to 4.75 percent in Sydney, saying the economy has “relatively modest amounts of spare capacity” and citing risk of “inflation rising again over the medium term.” It was the RBA’s first move in six months.

The move signals Stevens wants to avoid a repeat of 2007, when he held off raising rates for months as slowing inflation masked a build up in price pressures. Growth in Australia, which skirted a recession during the crisis, may strengthen as energy companies such as BG Group Plc add construction jobs.

“They’re trying to nip inflation in the bud,” Matthew Circosta, an economist at Moody’s Analytics in Sydney, said on Bloomberg Television. “Back in 2007 they were behind the curve” in raising rates and “I don’t think they want to make the same mistake this time around.”

The Australian dollar climbed to 99.71 U.S. cents as of 3:31 p.m. in Sydney from 98.82 cents before the announcement. The S&P/ASX 200 Index of stocks was little changed at 4,702.70.

Economists’ Forecasts

The decision, predicted by seven of 24 economists surveyed by Bloomberg News, was the second straight in which Stevens defied the majority of economists’ forecasts.

Stevens’s move comes a day before the U.S. Federal Reserve meets to consider pumping additional stimulus into the world’s largest economy. The divergence in monetary policies has stoked the Australian dollar, which has gained about 11 percent this year against the U.S. currency.

Australia’s jobless rate, at 5.1 percent in September, is about half the level of unemployment in the U.S. and euro zone. The International Monetary Fund predicts Australia’s growth will advance to 3.5 percent next year from 3 percent this year as resources investment intensifies.

“While the labor market is not as tight as in 2007 and 2008, some further strengthening would appear to be in prospect, judging by the trends in job vacancies,” the central bank said in today’s statement. “After the significant decline last year, growth in wages has picked up somewhat, as had been expected. Some further increase is likely over the coming year.”

End of ‘Moderation’

A “moderation” of inflation for the past two years “is probably now close to ending,” the RBA said.

Two days ago, BG Group said it will begin building a $15 billion liquefied natural gas venture in Queensland state, generating 5,000 construction jobs. Investment there and in Western Australia, including Chevron Corp.’s A$43 billion ($42.5 billion) Gorgon liquefied natural gas project, is growing because of stronger Chinese demand for raw materials.

“The bank still sees Australian interest rates as likely to continue to rise as the mining boom progresses,” said Ivan Colhoun, head of Australian economics at Australia & New Zealand Banking Group Ltd. “This likely reflects the need to move nominal rates higher to match any rise in inflation and, at some stage, to also raise real interest rates too.”

Today’s increase was announced half an hour before the running of the Melbourne Cup, dubbed “the race that stops the nation,” and means the central bank has moved borrowing costs in the past five meetings on the day of Australia’s richest horse race.

Banks’ Response

Borrowing costs at ANZ, Commonwealth Bank of Australia and Westpac Banking Corp. are under review, according to spokesmen at the lenders. National Australia Bank Ltd. spokesman George Wright said no decision has been made “at this stage.”

Treasurer Wayne Swan has urged banks not to boost borrowing costs by more than any central bank increases. Australia lawmakers are sensitive about the RBA’s rate increases as more than two-thirds of the population own homes, compared with less than 50 percent in some European nations.

Australia’s central bank signaled after its Oct. 5 meeting that the decision to leave borrowing costs unchanged was “finely balanced” with the case for an increase, as a rising currency helped ease inflation concerns. Most economists had forecast a quarter percentage-point increase at that meeting.

Job Market

While the government’s consumer price index rose 0.7 percent from the second quarter, less than the 0.8 percent median estimate in a Bloomberg News survey, that may be shrouding intensifying price pressures. An Oct. 7 report showed the biggest back-to-back monthly job increases since 1988.

The central bank’s measures of core inflation showed annual price increases also slowed last quarter. The bank aims to keep inflation in a range of 2 percent to 3 percent on average.

Stevens had paused after boosting borrowing costs in six quarter-point steps from October 2009 to May this year, the most aggressive round of rate increases among Group of 20 members.

Companies such as BHP Billiton Ltd., Rio Tinto Group and BG, the U.K.’s third-largest oil and gas producer, have helped spur a hiring surge as they increase shipments of iron ore, coal and energy to China.

The growth in mining investment was a reason IMF staff last week said Australia is starting to exhibit “early signs” of inflation pressures.

“With inflation projected to remain close to the top of the 2-3 percent target band, the RBA needs to guard against inflation expectations becoming anchored at too high a level,” the IMF staff said in an Oct. 29 report.

Among 33 members of the Paris-based Organization for Economic Cooperation and Development, Australia last year was the only advanced economy to avoid two consecutive quarters of contraction — a standard definition of a recession — along with developing economies Slovakia and Poland.

To contact the reporter for this story: Michael Heath in Sydney at mheath1@bloomberg.net;

To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net

IT is only a matter of time before interest rates rise again, with board minutes from the Reserve Bank of Australia (RBA) revealing that it "could not wait indefinitely" due to rising inflationary pressures.

Minutes from the latest RBA monetary policy board meeting, taken on October 5 and released on Tuesday, say that while the overall global outlook was broadly unchanged since the RBA board’s previous meeting, interest rates would need to rise "at some point".

A gradual tightening in resource utilisation meant that inflationary pressures would strengthen, the minutes say.

The minutes reveal that the decision to keep the cash rate on hold at 4.5 per cent, taken at the October 5 meeting, was finely balanced.

"While the board recognised that it could not wait indefinitely to see whether risks materialised, members judged that they had the flexibility to do so on this occasion," the minutes said.

Based on the medium-term inflation outlook, a case could be made to increase the cash rate at the October meeting as developments had been broadly consistent with central forecasts, the minutes said.

But members decided to leave the cash rate unchanged after accepting that the economy was expected to continue growing at trend in the near term, credit growth had softened and the rise in the exchange rate would effectively be "tightening financial conditions at the margin".

Board members also said it was "still possible" that downside risks to global growth could materialise.

"Members felt these arguments were finely balanced," the minutes said.

Overall, they concluded that it would be "appropriate to hold the cash rate steady for the time being," until evaluating further information at the next meeting, on Melbourne Cup Day, November 2.

The board noted that, despite the release of unemployment figures showing a 5.1 per cent unemployment rate in August, there had been a relatively limited amount of economic data released over the past month.

After rising to around record high levels in the June quarter, Australia’s terms of trade were estimated to have increased further in the September quarter but were then expected to decline gradually.

The minutes also noted that a slowdown in the pace of household borrowing had been accompanied by a cooling in the established housing market, and that the borrowing slowdown was a "welcome development".

There had been little new information on price and wage inflation, with consumer price index figures due out later in the month.

Good rainfall had led to conditions in the farm sector improving significantly.

In Europe, Ireland had been a focus of concern in financial markets and members noted that periods of "acute stress" in Europe were "likely to recur".

Meanwhile, business investment was expected to strengthen over the next few years and offset a scaling back in public investment.

Prospects for growth in Asia remained "solid" despite slowing from earlier in the year as the prices of many of Australia’s export commodities remained at high levels, board members said.

"Domestically, members noted that the economy appeared to be evolving broadly in line with the bank’s expectations," the minutes said.

The outlook remained for public spending to slow but for private demand to pick up, particularly in business spending.

Story by Kim Christian www.thesatellite.com.au

  The CEO of Australia’s largest independently-owned mortgage broker, Mortgage Choice, says the latest ABS housing finance data* highlights that warnings of interest rate rises are having a dampening effect on home loan demand.

The August ABS Housing Finance report 5609.0 shows a reduction in both the number and value of housing finance for investment housing, while the value remained steady for owner occupied housing finance. The total value of dwelling commitments dropped 1.3% from July to August 2010.

The number of owner occupied loans increased 1.0% and the number of loans for the purchase of established dwellings increased 1.4%. However, the number of loans for the purchase of new dwellings dropped 2.0% and the number of loans for the construction of dwellings dropped 1.0%.

Mortgage Choice CEO Michael Russell said, “It is no secret that winter delivered a slowed pace for housing finance demand, particularly from investors.”

“There is no doubt the Reserve Bank’s hold on the cash rate will shortly come to an end. What is just as worrying for potential and existing borrowers is how lenders will react to the news.

“To counteract any out of cycle rate movements, potential borrowers need to factor in higher loan repayments, create a savings buffer as early as possible and research their loan options thoroughly. It is important to know all the ins and outs before entering the mortgage maze.

“Some good news is that we have witnessed a dozen or so lenders announce product changes over the past couple of months. In a further sign that lender competition for home loans is rapidly returning, some lenders are offering special discounted interest rates and higher loan to value ratios.

“With a close eye on interest rates, potential and existing borrowers need to knuckle down now to prepare for rises by assessing their household budget, repayment strategy and the suitability of any home loan.

“A professional mortgage broker will introduce a borrower to a range of options, work to secure interest rate or fee discounts and put forward a solid case for loan approval. These are major reasons why 40% of all new home loans in Australia are sourced through brokers.

“Looking forward to the spring housing finance data, we will be keen to see if demand heats up.”

*All figures quoted are seasonally adjusted.

Source: www.australianhousehunters.com.au

Interest rates remaining unchanged for a fifth month.

The central bank left its key cash rate at 4.5 per cent, defying widespread expectations that it would increase it to 4.75 per cent.

"It’s a bit of a surprise," said Macquarie senior economist Brian Redican. "The press release (accompanying the RBA decision) looked consistent with an interest rate increase".

"The present uncertainty in the financial markets is keeping the RBA on the sidelines," Mr Redican said, adding ”that higher interest rates will be required."

Holders of a typical $300,000 mortgage are already paying $300 a month more than they were a year ago, when the RBA began the first of six rate rises to return borrowing costs to their long-term levels as the economy bounced back.

The reprieve for borrowers may be short-lived, though, with the big commercial banks flagging their intention to pass on rising funding costs in the form of higher interest rates.

There was speculation such an increase may come as early as today, but National Australia Bank, Westpac and ANZ said no change to their mortgage rates is imminent.
"We have not made any announcements regarding any changes to our standard variable interest rate at this time," said a spokesperson for NAB.

Westpac also ruled out a rate rise until after next month’s Reserve Bank meeting scheduled for November 2.

”Our standard variable rate remains unchanged in line with today’s RBA decision,” said a spokesperson for Westpac.
”We have no current plans to change our standard variable rate ahead of next months’ RBA meeting.”

The Commonwealth Bank said its rates are under review and declined to comment on its likely decision.

Rates outlook

And the prospect of an official rate rise still looms after the RBA hinted strongly last month it will use rate rises to combat inflation pressures from the booming commodity export sector – a suggestion repeated today by RBA governor Glenn Stevens.

”The current stance of monetary policy is delivering interest rates to borrowers close to their average of the past decade. The Board regards this as appropriate for the time being,” Mr Stevens said, in a statement accompanying the RBA decision.

”If economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target,” Mr Steven said.

Inflation figures for the September quarter are due on October 27, just days before the central bank’s next interest rate meeting on Melbourne Cup Day.

Financial markets were pricing in an increase of 41 basis points in 12 months’ time – implying at least one more rate rise by the RBA by then – down from 53 basis points prior to today’s RBA decision.

Stocks pared their day’s losses after the announcement, ending about 0.4 per cent lower for the day after being off more than 1.4 per cent earlier.

RBA view

The RBA signalled that continuing doubts about the health of the international economy contributed significantly to its decision to stay put on interest rates this month.

”Financial markets are still characterised by a degree of uncertainty, and are responding both to differences in growth outlooks between regions and evident strains on public finances and banking systems in several smaller countries in Europe,” Mr Stevens said in his statement.

Greece, Spain and Ireland are among European economies struggling to cope with soaring budget deficits and slowing growth.

By contrast, Australia’s economy is showing ”growth around trend over the past year,” with prices for the country’s commodity exports ”very high,” the RBA governor said.

Indeed, Australia’s key economic measures are mostly improving, with the government’s fiscal stimulus spending easing back just as private spending perks up to take up the slack.

Importantly, the quickening growth is yet to stoke a pick-up in inflation, with prices growth moderating from ”the excessive pace of 2008,” the statement said. ”The effects of the rise in tobacco taxes aside, CPI inflation has been running at around 2.75 per cent over the past year. That looks likely to continue in the near term,” he said.

The Reserve Bank aims to keep inflation between a band of between 2 and 3 per cent over the medium term.

Patchy economy

One reason why inflation has been held back so far is that the growth of the overall economy – excluding the booming mining sector – remains patchy.

Data out today on the services industry showed the sector has contracted for the past five months, while retail sales rose 0.3 per cent in August – less than the 0.4 per cent pace expected.

Housing has also been under a cloud with price growth flattening out in major cities while new building approvals have fallen for six of the last eight months.

Other areas of weakness include slow lending growth, implying that banks are holding back on loans to businesses.

Mr Scutt noted that the RBA focused also on subdued credit growth.
"This has been getting little or no coverage in recent times but this will be closely watched in the months ahead…Credit has been weak despite the strong domestic labour market," said Arab Bank Australia trader dealer David Scutt.

"With households unwilling or unable to borrow more at present, it offers a strong indication that household finances are struggling with rates at present levels."

Other economists pointed to the brevity of Mr Stevens’ comments.

”What’s notable is that it is quite a short statement,” said RBC Capital Markets senior economist Su-Lin Ong.  ”There’s virtually nothing about housing or consumption” on the statement, she said.

"It does suggest maybe the RBA is paying a little more attention to what’s happening in Europe and some of the strains in the banking system there," she said.

Even so, "a rate hike before the end of the year is more likely than not," she said.

czappone@fairfax.com.au  BusinessDay

Federal Treasurer Wayne Swan says banks could not justify raising rates above the official cash rate if the Reserve Bank of Australia increases its rates when it meets on Tuesday.

On September 21, the RBA kept its benchmark cash rate on hold at 4.5 per cent since the most recent increase in May.

The last rise capped off a series of six that began in October last year when cash was at a multi-decade low of 3.0 per cent.

But economists are predicting a rise when the bank meets at 1430 AEDT on Tuesday.

Mr Swan said there were issues on the long-term funding profile of banks but it still didn’t justify hitting customers with higher interest rates than those of the RBA.

"I don’t think there is any justification whatsoever for any bank to move above the official cash rate decision of the Reserve Bank," Mr Swan told ABC Radio.

"Banks are making healthy profits at the moment, their net interest margins are back above what they were before the global financial crisis."

HSBC’s chief economist Paul Bloxham expects the RBA 25 basis points this year, putting the brakes on an economy fuelled by China’s insatiable demand for resources.

Mr Bloxham says that if the central bank does not raise official interest rates at its meeting on Tuesday, it is likely to do so before the end of the year.

Story from ninemsn.com.au