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Economists warn that more pain is on the way

The new home loan rates will add a further $48 to the monthly cost of repaying a $300,000 mortgage and $64 to the cost of repaying a $400,000 mortgage, taking the total extra costs since October to $235 and $275 a month.

Calling the decision tough, the Treasurer, Wayne Swan, said it was ”unfortunately one of the difficult consequences of an economy recovering better than other advanced economies”.

The bank said ”considerable buoyancy” in the housing market and a bigger than expected mining boom that were certain to ”add to incomes and foster a build-up in investment” would boost Australian economic growth over the coming year and push inflation towards the upper end of its target band.

So big and earlier than expected was the resurgence in minerals prices that the bank expected them to soon surpass the peak reached before the onset of the financial crisis in 2008.

”With the risk of serious economic contraction in Australia having passed some time ago, the board has been adjusting the cash rate towards levels consistent with rates to borrowers close to average,” it said. ”The board expects that as a result of today's decision rates for most borrowers will be around average levels.”

The Macquarie rates strategist Rory Robertson said the bank was declaring ”phase one of momentary tightening over,” but he said phase two could start within months.

”I think the bank will pause at least one meeting, but as early as July it may have marshalled the arguments as to why policy doesn't need be just neutral; it needs to be restrictive. There is a clear and growing bias for rates to go substantially higher.”

Kevin Grice, an economist at Capital Economics in London, agreed, saying Australia was ”likely to be the first of the world's major economies to move beyond neutral”.

The political danger for the government is that the Reserve Bank's words will no longer allow it to claim that any future rate rises are part of the process of returning to normal.

Mr Swan said his ”no frills” budget on Tuesday would take pressure off the economy by attending to capacity constraints. Economic stimulus was already being withdrawn.

But the shadow treasurer, Joe Hockey, called on him to do more, saying he could take pressure off house prices by making available more land.

”Most governments in Australia are Labor governments – they control the supply of land. I would say ring up your mates in the states, end the blame game and get more supply of land.”

Mr Swan said the housing market had ”long-term” problems ”made worse by the impact of the global recession”.
SOURCE: Peter Martin – Sydney Morning Herald