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

MOUNTING evidence of accelerating growth among major Asian trading partners is shortening the odds of a rate rise tomorrow.

JPMorgan economists led by Stephen Walters added their voices over the weekend to predictions that the Reserve Bank would jack up official rates by 25 basis points when it meets tomorrow.

Stoked by a resources industry booming on the back of demand from China, inflationary fears have overshadowed recent signs of weakening credit growth and falling building approvals.

"Our conviction that a 25bp rate hike will be delivered by the RBA has risen, particularly given accumulating evidence that China is past its growth downshift," Mr Walters told clients.

Financial markets predict there is a 70 per cent chance the central bank will increase interest rates by 25 basis points to 4.75 per cent, with further rises expected through to next year.

HSBC’s chief economist, Paul Bloxham, said that if official interest rates did not rise tomorrow, the RBA was likely to act before the end of the year.

"That’s obviously a close call as to whether they go up this week or they go in November, but my broad view is that they will go up by the end of the year by 25 basis points," he told ABC television.

Mr Bloxham, who spent 12 years as an economist at the Reserve Bank, is predicting interest rates to rise by 125 basis points by the end of next year.

"The outlook for the resources sector is very strong and of course everything can’t grow at once in an economy, otherwise it puts upward pressure on inflation," he said.

But property experts warned a rate rise threatened to damage the nation’s housing sector as weekend auction clearance rates fell to 12-month lows on the back of two football grand finals and interest rate concerns.

Real Estate Institute of Australia president David Airey said it was still too soon to be thinking about lifting rates, and if the RBA did so, it would be making a "serious mistake".

"The economy is still in recovery . . . we would advise the RBA to wait until the quarterly CPI figures in late October before they make any decisions," he said.

Opposition Treasury spokesman Joe Hockey said if the RBA put up interest rates tomorrow, Labor’s economic management would be to blame. "If interest rates go up the government has responsibility . . . because they are still spending like drunken sailors (and) putting upward pressure on inflation," he told Network Ten’s Meet The Press.

But Wayne Swan cited the International Monetary Fund’s comments that the pace of stimulus withdrawal was "appropriate", and the government’s fiscal consolidation was faster than in the past. In his weekly economic note, the Treasurer said the government was committed to getting the budget back into surplus in 2012-13.

Mr Airey said there was "no doubt" tomorrow’s RBA meeting contributed to increased buyer caution over the weekend.

Total auction revenue was $149 million, down $144m on last week’s $293m and down $140m on the $289m collected on the same weekend last year.

Story by Lanai Vasek The Australian

Glenn Stevens was out last week sounding loud alarm bells about where interest rates are headed. It seems that as the economy belts full steam ahead into what Stevens has termed the biggest resources boom since the late 19th Century, interest rates are only headed one way, and that is up.

Of course, that is unless Australia is hit by global shocks that put the brakes on our growth, but Stevens isn’t assuming that is going to happen anytime soon.

Stevens know parts of Australia are already hurting, particularly those dependent on tourism, to whom the soaring Australian dollar has done no favours. Unfortunately though, Stevens has only got one stick, and he’s prepared to use it. Even Stevens admits interest rates are a blunt instrument when it comes to keeping the economy in check. It inflicts pain across Australia, even though much of the boom is happening in the west.

It certainly will start to put mortgage holders under pressure. The Real Estate Institute of Australia says we are now heading towards the average mortgaged up household across the nation devoting 35 per cent of their income to meeting loan repayments.

In NSW, mortgage holders are already spending 38 per cent of their income on loan repayments. To put that in perspective, that’s about what people across the nation were contributing to their mortgages back in the late ’80s when interest rates peaked at more than 17 per cent.

Many people were under that same pressure before the GFC hit, as can be seen in this chart, which shows house prices growth and the percentage of income people have been using to pay their mortgage over the last decade.

David Airey, president of the Real Estate Institute of Australia, says most people can comfortably manage paying 30 per cent of their income for housing, and after that things can start to get a little tight. Obviously that depends on how you spend the rest of your money, but throw a couple of kids into the mix, and the budget starts to stretch a bit thin. Airey predicts that if interest rates climb higher, pain will start set in for mortgage holders.

So what do rises mean for you? If you have a variable mortgage, you are most likely to be paying about 7 per cent to your lender. On an average 30-year $373,000 loan, that would be costing you $2482 in monthly repayments.

There’s talk of five rate rises to come from one expert, Paul Bloxham, who recently left a job with the RBA to become the chief economist at bank HSBC. Bloxham has predicted the official cash rate could hit 5.75 per cent next year, and that there will definitely be at least one 0.25 per cent increase before Christmas. The Commonwealth Bank is talking of official rates of 6 per cent, and Westpac is betting on about 5.25 per cent.

Of course, the official cash rate is way below what you pay to your lender. So if your bank was to pass the first predicted rise on in full, you’d see your variable rate jump to from 7 per cent to 7.25 per cent before Santa arrives. That would make your monthly repayment $2545, $63 more than you are paying now.

Is Bloxham is right and are there five rate rises are headed our way? Five rises would spike your rate to 8.25 per cent and on the average new mortgage, your monthly repayments would jump to $2482, $320 more than you are forking out now. Over a year that comes to $3840.

There is always the chance that banks can increase their rates by more than the Reserve Bank does, and at least two big banks are rumoured to be considering this next time around. So you might need to factor in a bit more.

In terms of what you would be paying out of your income onto your loan, this is what could happen to the average mortgage holder at various interest rate scenarios, making some assumptions about wages growth and house price growth.

Rates rises are dependant on the economy zooming along, and there is the chance that it could go the other way. But general consensus among economists seems to be we are headed for growth.

Some people will be asking themselves is it time to fix? Fixed interest rates have been falling for the past couple of months, but are now edging back up. Australia’s largest independently owned mortgage broker, Mortgage Choice, says in the past fortnight, three lenders on its panel increased rates on one or more of their fixed rate products. The company’s weekly interest rate averages for its panel of 24 residential lenders showed a rise in the three-year fixed rate, albeit a small one, to 7.37 per cent from 7.33 per cent. Three years is the most popular fixed term.

The average one-year fixed rate also rose, from 7.02 per cent to 7.03 per cent, while the five-year fixed rate was steady at 7.81 per cent.

Mortgage Choice spokeswoman Kristy Sheppard says this compares to an average basic variable rate of 7.07 per cent and standard variable rate of 7.36 per cent.

Sheppard says choosing between a fixed and a variable home loan is a decision that must be made according to individual financial circumstances, lifestyle and future needs. There are pros and cons to each. Sometimes borrowers hedge their bets by splitting the loan between the two options.

So what to do now? The best thing is to start paying more off your mortgage. See whether your budget can cope with up to five increases, and then you’ll know how you would fare if that prediction does eventuate. Of course, you’ll also pay your mortgage off faster by jumping in with extra repayments now, and build yourself a buffer should your financial circumstances suddenly change.

Source: www.domain.com.au

Carolyn Boyd is a property journalist and keen follower of Australia’s housing market.

Mortgage holders can breathe easy for another month after the Reserve Bank yesterday decided not to increase interest rates.

In a sign that the Reserve Bank thinks the economy is bubbling along nicely, it opted to keep rates on hold at 4.5 per cent.

Each 0.25 per cent interest rate rise adds another $50 to the monthly cost of an average mortgage. Australian mortgage holders are already paying about $300 more per month in repayments than they were a year ago.

Mortgage holders on variable interest rates are being charged about 7.4 per cent by their lenders.
With the drawn out Federal election, the property market has remained steady in recent weeks and a slower than usual start to the Spring selling season is predicted.

A private gauge of Australian inflation slowed during July, adding more weight to suggestions the Reserve Bank will keep the official interest rate at 4.5% at tomorrow’s meeting.

The TD Securities-Melbourne Institute revealed today its consumer price inflation gauge rose 0.1% in July, down from June when it rose by just 0.3%. The annual pace of inflation slowed to 2.8%, within the RBA’s 2-3% target band.

The data comes after official figures revealed a slowdown in annual underlying inflation to 2.7%.

"The soft CPI report allows the RBA to remain on hold for several months as mortgage lending rates have already been restored to average levels," Annette Beacher, a senior strategist at TD Securities, said in a statement.

The inflation gauge reveals utilities, health services and alcohol and tobacco prices all rose, but they were offset by declines in food, holiday travel and petrol, which actually dropped by 2%.

Meanwhile, Australian manufacturing activity increased in July with new orders and output both expanding, although employment has declined.

The Australian Industry Group-PriceWaterhouseCoopers performance of manufacturing index rose by 1.5 points to 54.4 during July, above the 50-point level separating expansion from contraction.

Story by Patrick Stafford www.smartcompany.com.au

When yours truly was on Seven’s Sunrise back in May it was acknowledged by both David Koch and myself that the Reserve Bank of Australia (RBA) would be unlikely to lift rates that day, with the knowledge that things were looking worse in Europe and there were already signs of a slowdown on housing here. We were wrong.

The RBA lifted rates that day by yet another quarter point to 4.5 per cent. At the time it was largely expected by economists.

However, I believe it was a serious mistake to lift cash rates; similar to the mistake made in 2008 when the RBA thought lifting rates was a prudent idea in the first half of that year.

Now, sure, the RBA board members do not have a crystal ball and can only go on present information at hand. So it was not to know of the events on Wall Street and in Europe later in the week (the so-called "flash crash").

However, Europe had been simmering for some time before May and as each week had gone by in March, and then in April, the situation was becoming worse and worse.

Yet the RBA moved rates higher in May largely on the belief the housing market was still surging ahead. This belief was due to, among other factors, auction clearance rates.

But, as I have stated before, there has been an increasing number of passed-in auctions failing to make it into the official results and clearance rates.

The problem with this is that the RBA has been relying on auction clearance rates to get an indicator of the market. Naturally, to think that it may have lifted interest rates in May partly based on incorrect data is a disturbing thought.

Now, not much more than a month later, the banks are starting to cut their fixed rates. And banks only tend to do that when they are sure cash rates have peaked.

Even the real estate spruikers have been stating the housing market is slowing. You know the market is seriously slowing when they do that.

The positive news in all this is that the probability of further interest rate rises this year has all but been eliminated. And I believe the next move is actually going to be down.

That is because the RBA was lifting rates to stop a potential housing bubble. Now that risk has gone and, indeed, the risk has increased for house price falls, the RBA can accommodate a cut and will likely make a cut if Europe drags us down and/or house prices retreat.

The RBA will never admit it, but it made a mistake in May. And that’s why I believe the probabilities have risen that the next move will be down.

Louis Christopher is the managing director of SQM Research and the head of property at Adviser Edge.

The Reserve Bank has opted to keep interest rates steady at its board meeting today.
It was a widely expected move and will give mortgage holders another welcome breather from the six rate hikes they have endured since September last year.

"It looks as though the earlier interest rate hikes are already biting," says Domain.com.au blogger Carolyn Boyd. "Auction clearance rates are down and house price growth is cooling. Real estate agents are also reporting there are less people looking to buy."

Each 0.25 per cent interest rate rise adds another $50 to the monthly cost of an average mortgage. Australian mortgage holders are already paying about $300 more per month in repayments than they were in September last year.
Mortgage holders on variable interest rates are currently being charged about 7.4 per cent by their lenders.

The housing industry has lashed out at the Reserve Bank’s rate rise today, claiming it will discourage the construction needed to relieve the nation’s housing affordability crisis.
One developer went further, claiming future rate hikes threatened to trigger a collapse of Melbourne’s housing market.
The RBA lifted interest rates to 4.5 per cent from 4.25 per cent today, pushing up the monthly cost on an average $300,000 mortgage over 25 years by $46. It’s the sixth increase since October, which together have added an estimated $300 in monthly repayments to borrowers.
Housing Industry Association senior economist Ben Phillips predicted housing affordability will sink to new lows in the coming year as interest rates rise and the nationwide shortage swells to 200,000 homes.
”Negative signs are already appearing in the new homes market with both building approvals and home lending figures down over 2010,” he said.
Rising costs for loans shrinks the number of would-be purchasers of homes. That in turn saps the demand for the new construction of homes, although substantial numbers of would-be buyers are estimated to be avoiding the supercharged market in which prices jumped 20 per cent in the year to March.
Mr Phillips said higher interest rates wouldn’t help the increase the supply of housing stock called for in the Henry Tax Review released this week. The government either shelved or rejected recommendations including the introduction of a land tax and reductions to negative gearing deductions.

RBA ‘out of its depth’

Leanne Pilkington, general manager of Sydney real estate agency network Laing+Simmons, said the rising interest rates confirmed that ”the RBA is out of its depth when it comes to devising measures to control an overheated housing market.”
Blaming the imbalance between housing supply and demand, Ms Pilkington said, ”Interest rate increases are clearly having no impact on dampening inflated residential property prices, particularly in New South Wales.”
Victorian property developer Villawood Properties labelled the RBA’s rate move ”impetuous” saying the demand in the Melbourne market is already slowing and further rate rises could trigger a housing collapse.
”With much of the demand in the current market fuelled by foreign investment, the Federal Government’s recent proposed restrictions will assist to ease demand on its own – without the need for today’s rate increase,” said Villawood Properties executive director, Rory Costelloe.
”Should the RBA continue to push rates skyward Melbourne’s strong property market is likely to experience a housing collapse.”
Melbourne led home price rises in the past year among capital cities, rising almost 28 per cent in the year to March, the Australian Bureau of Statistics reported yesterday.
The government has tightened requirements on foreign buyers last month in response to anecdotal reports of a flood of overseas money coming into the local real estate market.

Impact felt

Australasia’s largest real estate and property group, Ray White, said the central bank’s interest rate strategy was finally having an effect on residential sales.
The Ray White Group’s Australian business grew by 8 per cent in April, compared with a year earlier.
”This was the slowest increase on (the) previous year’s results since the economic downturn of late 2008,” said Ray White Joint Chairman Brian White.
”Judging by our April results, it looks as if the interest rate increases are having an impact on activity in the Australian residential market,” the company said in a statement.

czappone@fairfax.com.au

Australian mortgage holders are a third time unlucky this year, after the Reserve Bank board today lifted interest rates by 0.25 per cent. It is the third rate rise in as many months.
Mortgage holders will be disappointed with the increase. After being told by the Reserve Bank Governor, Glenn Stevens, that rates were getting close to normal levels, borrowers would have been hoping the pace of rate rises had slowed. Today’s 25 basis point rise takes the official rate to 4.50 per cent.
It is the sixth increase since September and means mortgage holders are now paying about $300 a month extra for their mortgages than they were in the middle of last year, says Domain.com.au blogger and property author Carolyn Boyd. "There were a lot of mixed signals this month that may have had mortgage holders thinking they were in for a break. While inflation last week came in higher than expected, consumers have been spending less at the shops."
Until today’s decision, mortgage holders on variable interest rates were paying about 7 per cent to their lenders. The rates that borrowers pay to their financial institutions are expected to normalize at about 7.5 per cent to 7.75 per cent by year’s end. That could signal there are still one or two more rate rises to come before Christmas.