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Rates: are bananas to blame?

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Where experts are parting ways concerns why rates were lifted, and the precise impact they will have on the domestic economy, particularly on housing prices. Media hype has almost exclusively centred on bananas and petrol prices, but are these really to blame? "I don't think that the RBA takes into account things that are such one-off short term events. Wages pressure is growing, but I think the biggest issue is petrol - we have been absorbing costs in our businesses for quite some time, and producers are only just starting to pass these on to consumers," said John Edwards, managing director of Residex. While food and other non-discretionary items are not the sole cause of the above target inflation result, which fed into the RBA's decision to raise rates, it's still cause for concern, said Edwards. "Meat's up, vegies are up - all the things that we really need." Edwards believes that the effects of this rate rise may not be absorbed straightaway, because many people will run to their credit cards to help plug any budgetary gaps caused by increased monthly repayments. Lenders have wasted no time in upwardly revising their standard variable rates, and Edwards points to potential pressure to be exerted on fixed rates going forward. However, Rod Cornish, head of property research at Macquarie Bank disputes this claim, on the basis that long-term rates remain lower than short-term rates. The exact effect on housing markets in each state hinges on whether a third rate rise transpires for 2006. Many experts believe that this rate rise will have the necessary dampening effect on other parts of the economy, including the resources sector. Thus, the next move is likely to be down, rather than up according to Cornish. "We envisage no further rise in interest rates - they will hold steady until 2007, and we expect the RBA to cut rates by the second half of the year." However, the pressure of two rate rises is already evident: the downturn has been exacerbated in Sydney, Brisbane and to a lesser extent, Melbourne. "Without the rate rise, we would have established a stabilising phase in the eastern states, but now this has been pushed out to 2007," said Cornish.

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