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FURTHER official interest rate rises could choke off consumer spending and grind the economy to a halt, economists warn.

Herston Economics chief economist Clifford Bennett says if the Reserve Bank raises the cash rate to five per cent by year’s end, the economy would “grind to a standstill”.

The current cash rate is 4.25 per cent, after the RBA lifted the rate by a quarter of a percentage point on Tuesday in an effort to further rein in expansionary pressures.

It was the fifth monthly interest rate rise by the central bank since October last year.

“If the cash rate gets to 5 per cent … the domestic economy will grind to a standstill,” Mr Bennett said.

“We’re seeing in the Sydney press examples of them having to choose between buying groceries and paying their electricity bill and the added burden from the RBA is completely unwarranted, unnecessary and unwanted.”

RBA governor Glenn Stevens said it was appropriate to raise the cash rate towards its long-run average given that “the risk of serious economic contraction

Most economists say the average long-run cash rate is around 5 per cent.

Nomura Australia economist Stephen Roberts said rising interest rates meant consumers were paying a greater proportion of their income in servicing debt.

Data compiled by the central bank showed that when the cash rate was 3.75 per cent at the and of the December quarter of 2009, the average household was paying more than 10 per cent of its income, minus taxes and some other regular payments, on interest payments.

When the cash rate topped 18 per cent in December 1989, the average household was spending just under nine per cent of its income on interest payments.

The figures also show that in December quarter of 1989, household debt was slightly less than half household yearly income.

Twenty years later it was equal to one and a half times an average household’s yearly income.

“That data is from fourth quarter (2009) and you have to remember we’ve had two more interest rate rises already,” Mr Roberts said.

He said a lower interest rate of 3.75 per cent to 4 per cent would be more appropriate given the current difference between the cash rate and the interest rates of major lenders.

Official economic data now points to a slowing economy, with building approvals, employment and retail sales data for March all coming in under market expectations.

Mr Bennett said the data suggested Australia’s economic performance post the global financial crisis was weaker than first thought.

“When you look at the domestic economy, there are patchy elements,” he said.

“There are storm clouds on the horizon.”

Source  :  www.news.com.au

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Reserve Bank governor Glenn Stevens has signalled interest rates are on their way back up with mortgage rates likely to edge up between half and a full percentage point.

Giving evidence to the House of Representatives economics committee in Canberra, Mr Stevens said the RBA’s focus continued to be on what mortgage rates were offered by commercial banks rather than on the Reserve’s official cash rate.

He said given the commercial banks had lifted rates over and above what the RBA had done, there was still about a half and a full percentage point to go before mortgage rates were back to what the Reserve would consider close to their long term average.

“There’s a little distance to go yet before I think you could characterise the setting of interest rates as normal or average,” he said.

The RBA surprised markets by leaving official rates on hold at its February meeting.

Mr Stevens said on top of the Reserve’s own lift in official rates, the commercial banks actions had effectively delivered three and a half interest rate rises to mortgages cases, and in the case of Westpac customers, four rate hikes.

He said one of the advantages of lifting rates as the RBA did in the last three months of 2009 was that it could hold rates in February and get a clearer picture of how the economy was travelling.

“You get that luxury when you can wait a little a bit further down the line,” he said.

Mr Stevens said Australia had performed much better than even the RBA had expected out of the global recession.

But he warned that meant the economy was now heading into an upswing stronger than otherwise would have been the case.

“With the economy having had only a mild downturn with begin the upswing with less spare capacity than would typically be the case after a recession,” he said.

“There’s less scope for robust demand growth without inflation starting to rise again down the track.

“Monetary policy must be careful not to overstay a very expansionary setting.”

Mr Stevens said the resources sector in particular was looking to grow quickly, with the terms of trade likely to head back to the record highs seen in 2008 this year.

He also highlighted the strength of Australia’s sovereign debt position, hosing down fears the country was carrying too much debt.

“Australia’s position is by any measure very strong indeed,” he said.

The governor also played down fears raised by Opposition finance spokesman Barnaby Joyce that Australia could default on its debts.

Mr Stevens said Australia had never defaulted before and there were no signs it would now.

“I very much doubt there ever will be,” he said. 

“Monetary policy must be careful not to overstay a very expansionary setting.”

Mr Stevens said the resources sector in particular was looking to grow quickly, with the terms of trade likely to head back to the record highs seen in 2008 this year.

He also highlighted the strength of Australia’s sovereign debt position, hosing down fears the country was carrying too much debt.

“Australia’s position is by any measure very strong indeed,” he said.

The governor also played down fears raised by Opposition finance spokesman Barnaby Joyce that Australia could default on its debts.

Mr Stevens said Australia had never defaulted before and there were no signs it would now.

“I very much doubt there ever will be,” he said.

Source www.thewest.com.au

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  • Banks say they will be forced to lift rates
  • Will be more than official RBA rises
  • Facing higher costs of raising money
  •  

     

    BANKS have confirmed homeowners’ worst fears: they will increase mortgage rates by more than the official Reserve Bank rises in the coming months.

    The Big Four banks claim they will be forced to lift interest rates beyond the official RBA cash rate increases because they are facing higher costs of raising money in the wholesale markets.

    Full story  :  http://www.news.com.au/business/money/story/0,28323,26194165-5013952,00.html

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    The ANZ has become the first major bank to lift its mortgage interest rates, announcing this morning it will lift rates by a quarter percentage point.anz

    Following the Reserve Bank’s decision on Tuesday to lift the official cash rate, all the big four had held fire on following suit – until today.

    The ANZ tried to dampen the pain of the move, saying it would also increase interest rates on some of its deposit products by a half percentage point.

    The increase on ANZ mortgages, which will take the standard variable rate to 6.06 per cent, will kick in from next Monday.

    As well, fixed rate mortgages at ANZ will go up by a quarter percentage point – to 5.7 per cent for a one year fixed rate mortgage and 6.69 per cent for a two year mortgage.

    Longer term mortgages will go up less, while the 10 year term rate will be cut by a quarter percentage point.

    Treasurer Wayne Swan had warned all banks against lifting their mortgage rates by more than the Reserve Bank’s increase in the official cash rate.

    Source  :  www.thewest.com.au

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    THE Federal Government is trying to confirm the identities of three Australians believed to have been killed in the Indonesian terrorist hotel blasts.

    Prime Minister Kevin Rudd told a press conference tonight that he had grave concerns for one embassy official and two other Australians in Jakarta.

    Perth businessman Nathan Verity is believed to be one of the Australians killed in the bombings, which Mr Rudd described as “appalling”.

    Jim Truscott, a personal friend, said Mr Verity had run a human resources and recruitment business out of Jakarta, but lived in Perth with his wife Vanessa and five-year-old son.

    “He only lived in Jakarta for work. He would spend a couple of weeks in Jakarta and couple of weeks in Perth,” Mr Truscott told Fairfax Radio.

    More Information  :  www.news.com.au

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    SYDNEY (AFP) — Prime Minister Kevin Rudd officially launched Australia’s bid to host the football World Cup in 2018 or 2022.

    Rudd told an official ceremony at Parliament House in the national capital Canberra that Football Federation Australia (FFA) had the full backing of the government to bid for the showpiece event.

    “The sheer odds are tough against Australia, eight other countries, but the reason the government had got behind the bid is that we as a nation can rise behind this great bid,” Rudd said.aus_worldcup

    The premier said the chance to host a World Cup was a great opportunity for the nation.                               

    “The challenges are great, but the prize is much greater,” he said.

    “I salute those who have had the courage and the initiative and creativity to bring forth this idea.”

    English Premier League stars, national skipper Lucas Neill and goalkeeper Mark Schwarzer, also spoke at the launch, urging Australians to throw their support behind the World Cup bid.

    FFA chairman Frank Lowy said it would be an “unparalleled opportunity” for Australia to earn official acceptance as a World Cup host.

    “On the world stage, there is no event with the same level of global appeal or audience reach as the FIFA World Cup,” the property billionaire said in a statement.

    Lowy said Australia?s “secret weapon” for winning the World Cup bid was the Australian people, and Australia’s desirability as a travel destination.

    “People from all over the world want to visit our country and thanks to the performance of the Socceroos at the 2006 FIFA World Cup in Germany, as well as the many thousands of Australian fans who followed them, the rest of the world has a very positive view of us.”

    Lowy also pointed to Australia’s record of hosting successful major sports events such as the 1956 and 2000 Olympic Games.

    Australia are among nine bidders, along with Belgium-Netherlands, England, Indonesia, Japan, Mexico, Portugal-Spain, Russia and the United States, for the 2018 World Cup.

    The same nine bidders are also in the running for the 2022 World Cup, along with Qatar and South Korea.

    World football governing body FIFA will announce both the 2018 and 2022 World Cup hosts in December 2010.

    Australia have already qualified to play in next year’s World Cup in South Africa.

    Source  :  www.google.com

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    AUSTRALIA is still doing better than other major economies despite a jump in jobless figures, Prime Minister Kevin Rudd says.  kevin-rudd

    The unemployment rate has risen to 5.7 per cent, after the total number of people in work fell by 1700, official May jobs data showed today.

     “Today we have seen an increase in unemployment to 5.7 per cent, returning to where it was in March this year, although employment remained fairly steady falling by 1700,” he told delegates at an Australian Industry Group lunch in Sydney.

    He said the unemployment figures were indicative of how the financial crisis was affecting Australia.

    “The global recession is continuing to have a direct impact on the Australian economy and Australian jobs,” Mr Rudd said.

    “No one likes to see unemployment rise because of the global recession … (but) Australia’s unemployment rate remains lower than all other major advanced economies except Japan.”

    He said the figures would have been far worse had it not been for the government’s stimulus packages.

    “`Without our nation building plans, over 200,000 more Australians would be out of work,” he said.

    Source www.news.com.au

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