By Robert Carry

Mortgage holders will be able to absorb the added costs brought on by interest rate hikes, Reserve Bank assistant governor Dr Philip Lowe has said.

Dr Lowe told a conference yesterday that most borrowers understood that the monetary policy setting seen over the past 12 months was "unusual".

Speaking at a Citigroup Australian Investment Conference, Dr Lowe said, "As interest rates rise, I think most people have factored that in to their budget considerations, so we are not expecting that to cause budgetary difficulties."

Dr Lowe dealt with accusations that the RBA's decision to increase the cash rate by .25% at the beginning of the month was premature by pointing out that criticisms are voiced whenever interest rates go either up or down. He added, "I think the big point here is the settings of interest rates that we had were put in place at a time where there were very serious people, respectable people, who argued that the world economy could be going to a situation like the 1930s. That's not the world we live in now."

According to reports in The Sydney Morning Herald, Dr Lowe also predicted that exchange rates would be higher than has been seen over recent decades. He pointed out, "A country with a higher return on capital, which Australia has, will have a higher exchange rate than a country with a low return on capital."