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Mortgage rates may go higher

19 September 2007

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The Reserve Bank governor, Glenn Stevens, has warned that interest rates for many borrowers could keep climbing while the turmoil on money markets caused by the US sub-prime lending meltdown lingered.

This will have a similar effect on the economy to higher official interest rates and suggests the Reserve Bank may leave rates unchanged until the economic consequences of the global credit crunch become more apparent.

Mr Stevens also used a speech in Sydney yesterday to declare that the way he manages interest rates won't change if a Labor government is elected.

"There's very strong bipartisan support for the policy that I'm engaged in operating," he told a business lunch.

"Both the Government and the Opposition are committed to an inflation target, an independent central bank and so on, so that part of economic policy won't be any different."

The Government claims interest rates will always be higher under a Labor Government because it would adopt more inflationary policies. In response, Labor has vowed to run a tight budget policy in a bid to keep pressure off rates.

Mr Stevens said the current jitters on international money markets "may persist long enough" for more banks to pass on higher costs to borrowers by lifting interest rates.

"Some borrowers are being asked to recognise this higher cost in the rates they pay for their loans, a trend that will continue if the higher funding costs persist," he said.

"Hence it appears, at this stage at least, that we may well observe a further tightening of financial conditions in the Australian economy in the months ahead."

Meanwhile, a report on the mortgage industry by JPMorgan and Fujitsu Consulting has said about 600,000 households are likely to experience at least mild mortgage stress by the end of this year. There was a risk that 113,000 of those households would be in severe mortgage stress, meaning a significant risk of default, the report said. The current squeeze in global credit markets was contributing to the increased level of mortgage stress.

However, Mr Stevens delivered an upbeat assessment of the Australian economy. It had been "travelling very strongly" and there were few signs that momentum was slowing, he said.

In these circumstances any additional restraint on the economy - like tighter financial conditions being caused by the global credit crunch - "would perhaps not be unwelcome". However, the economic problems in the US had weakened the outlook for global growth, he said.

The Commonwealth Bank's chief economist, Michael Blythe, said official rates were likely to remain on hold for the time being. "These sorts of comments suggest that the RBA intends to remain firmly ensconced on the sidelines until the dust settles," he said.

The chief economist at HSBC, John Edwards, said Mr Stevens's comments indicated that, for now, events on global financial markets might have done the central bank's work. "We think another tightening remains likely, but not until December this year or February next," he said.

The Finance Minister, Nick Minchin, said yesterday the timing of the federal election would not be determined by the possibility of interest rate movements.

"The timing will be one that is responsible and in the national interest and won't be influenced by trying to second-guess the Reserve Bank," he said.

The Reserve Bank increased interest rates last month and there has been speculation it might lift interest rates again in November - potentially during the election campaign - if next month's consumer price index figures show inflation still on the rise.


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