Wednesday, March 5, 2008

A Matter Of Interest

The reserve bank of Australia has now increased interest rates 12 times in succession, handing us the highest rates in 12 years with the cash rate now at 7.25%. That means mortgage rates will rise to about 9.25%. Or does it. There is widespread speculation that the retail banks will take the opportunity to make even bigger increases to cover the cost of the global credit crisis. Some have suggested the added impact could amount to as much as another 20 basis points, which will take mortgage rates to around 9.45%.

At the same time, we have seen rising rates of repossessions in the housing market, along with falling house prices in some locations. On top of that, the newly released economic growth figures reveal that the economy grew at 0.6% in the December quarter. Wages growth for the same quarter has fallen to 0.9%. Other reports indicate that retail sales have slumped in January. So has the Reserve Bank already succeeded in stopping the inflation threat?

It’s tempting to say yes, but going by the hard figures alone it is too early to tell. But that is the challenge. The lasting impact of interest rate adjustments take time to filter through to the economy, and more time to show up in the reported results. It is possible that the Reserve Bank has already gone too far, but as yet there is nothing to indicate that. What makes this all the more difficult is the fact that conditions in the United States might yet have more impact here than was previously expected.

The bottom line however is that for those people whose homes are being repossessed the damage has already been done.

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