Homeowners slugged with 0.25% rate rise

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Australian homeowners have been slugged with another 25 basis point rate increase today as the Reserve Bank of Australia (RBA) lifted the official cash rate to 7.0%, forcing many struggling homeowners closer to foreclosure.

Tuesday's rate rise - the 11th consecutive increase by the RBA since 2002 and the fourth increase in just over a year - pushes Australia's cash rate to 7% - a 12-year high.

In his announcement, Governor Glenn Stevens pointed to "significant inflation pressures" as the main driver behind today's decision.

"CPI inflation on a year-ended basis picked up to 3% in the December quarter, with underlying measures around 3½%. This was a little higher than was expected a few months ago," he said.

"In the short term, inflation is likely to remain relatively high and will probably rise further in year-ended terms, though the Bank expects it to moderate somewhat next year."

Stevens said the Board took "careful note" of recent events abroad and developments in financial markets, but believed that despite the slowing of the world economy and dampening of global growth, Australia's terms of trade are likely to rise further.

Today's decision creates an increased burden for would-be property owners and those already in debt, many of whom are already struggling, said Real Estate Institute of Australia (REIA) President, Noel Dyett.

"Today's increase will add around $40 per month to average loan repayments; over the past year, interest rate rises and increasing house prices have seen average loan repayments increase by approximately $260 per month," Dyett said.

"Renters will also be negatively affected by the latest increase, as property owners seek to recoup increased mortgage costs by raising rents. This is a growing area of concern. REIA property data shows that up to 27.8% of family income is used for rent in some cities, with the proportion increasing each quarter."

On the plus side, Australians with decent cash reserves will be smiling today, with banks already announcing increases to their top-line savings accounts.

BankWest retail chief executive Ian Corfield said the rate rise would be "welcome news" to all Australians trying to put money aside in 2008.

"In the current volatile market, cash is a safe haven for those who are trying to build or protect a nest egg for whatever purpose. It's been a long time since cash rates were looking this good, and with a rate of up to 7.5% pa for retail investors it is an opportune time for any Australian to give their savings plan a kick-start."

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