Rates may skyrocket by the end of the year

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While interest rates are likely to remain on hold in the near term, borrowers can expect a rise of 100 basis points by the end of the year or the beginning of 2012 according to Access Economics. The rise would add $200 a month to the average mortgage.

The company's predictions echo those of many other industry analysts. Following lower than expected inflation figures from the Australian Bureau of Statistics, the RBA is expected to leave rates on hold when it meets on Tuesday.

"The Reserve Bank will be heartened by the low inflation result and will remain firmly on the interest rate sidelines until mid-year," CommSec economist Savanth Sebastian predicted.

"The super-low inflation reading all but ensures that interest rates will remain on hold next week. And given that interest rate settings are already restrictive it is looking likely that the next rate hike will not take place until well into the June quarter – especially given that there are parts of the economy like construction, manufacturing and the services sector going backwards."

However, Access Economics predicts this rate freeze will soon pass.

"Don't get your hopes too high that the Reserve Bank has already done its dash on interest rates for this cycle," a report by the company said. "Capacity is too tight, income is rising too fast, and underlying inflation is already close to bottom."

Sebastian agrees that the central bank may feel the need to tighten rates toward the latter half of the year. He indicated the rebuilding efforts from the recent floods may add to inflationary pressures on the RBA.

"The floods around Australia and the resulting rebuilding phase have the potential to add to inflationary pressures in terms of building costs and sliding unemployment. The key will be how quickly labour markets tighten up. If wage inflation becomes an issue then the Reserve Bank would have to move on the rate front," Sebastian commented.

 

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