While the Reserve Bank of Australia (RBA) left interest rates on hold this month, it will raise rates in November, December and February, according to a leading economist.
Alan Oster, group chief economist at National Australia Bank, said a string of positive economic data will force the RBA to move earlier than expected to raise rates.
“Markets have now more than fully priced a 25 basis point hike by November and, against the continuing flow of positive data both at home and abroad, especially in Asia, it now seems likely that the RBA will ratify the market’s expectations of rate hikes before Christmas,” he said. “September and October still seem too early but by November we expect the time will be right for the first hike.”
The predicted rate hikes would take the cash interest rate to 3.75 percent, a move that would add $119 to the monthly repayment on a $300,000 mortgage.
Mr Oster added that further rate hikes will follow in 2010-11.
“Two further 25 point moves in August and September 2010 are then likely, taking the rate to 4.25 percent by year-end,” he said. “Over 2011, we expect further policy tightening to 5.5 percent by the end of the year.”
If rates rose to 5.5 percent, the monthly repayment on a $300,000 mortgage would rise by around $420.
Meanwhile, Federal Treasurer Wayne Swan has warned that the retail banks will raise interest rates independently of the RBA.
Speaking after the release of national accounts figures that showed Australia’s economy is continuing to grow despite the global recession, Mr Swan said funding costs may force the banks’ hands.
“There may come a time where events in international markets increase the cost of global funding (and) increase to the point, where rates may be pushed up by the banks,” he said.
The warning that rates will rise soon has reignited fears of that a property bubble, fuelled by low rates and easy credit, could be waiting to burst.
In its latest assessment of the Australian economy, the International Monetary Fund (IMF) warned that Australian house prices are overvalued by up to 20 percent and that low rates, government subsidies and ongoing strong immigration will continue to push house prices higher.
However a “sharp fall in house prices” remains a risk.
The problem is being exacerbated by a growing gap between household incomes and house prices, the IMF said.
The Reserve Bank of Australia recently flagged its concerns that a combination of easy credit, low interest rates and lack of supply could create a property bubble which could burst in the longer term, causing a collapse in house prices.
Concerns over a bubble are being exacerbated by frenzied activity in the property market which has seen the size of the average new mortgage rise to a record $354,137.