Interest rates to keep on rising

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ANZ, NAB, Westpac and the CBA have all rushed to lift interest rates on their standard variable home loans, following the Reserve Bank of Australia's (RBA) decision to raise the cash rate by another 0.25%. The increased interest rate will add about $50 to the monthly repayment on a $300,000 loan taken over 30 years.

Craig James, chief economist with CommSec, said that a third of Australia's households won't be unduly concerned, having paid off the home mortgage. However, for mortgagors, the rate hike will mean more bad news and more budgeting. "Someone with a $300,000 home loan is paying $310 a month more in repayments than they were a year ago. That's got to hurt. Until now, consumers have remained confident, but the rate hikes have made them reluctant to spend. But now those confidence levels are under threat and that means more budgeting and even less spending. Not only are interest rates marching higher, but petrol prices, utility charges and health costs are all moving higher."

James added that there is now a far stronger case for the RBA to pause in the rate hiking cycle - especially given the fact that it now believes borrowing rates are back to "normal". "More than likely the Reserve Bank won't be able to stop at 4.50% - even though those rates are the highest in the developed world. The Reserve Bank will need to move monetary policy to restrictive settings - designed to slow the economy down - over the second half of 2010. Borrowers should work on the assumption of cash rates between 4.75-5.25% at end year."

Many economists are predicting interest rates to hit 9.5% in the later part of 2011.

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