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RBA hints at home loan rate rise pause

After six rises in official interest rates since October, the minutes of this month's RBA board meeting say mortgage rates are back to their long-term average.

”Members felt that this would leave monetary policy well placed for the present,” say the minutes, which were published yesterday.

The RBA raised rates to 4.5 per cent at the meeting but economists said the comments suggested rates would stay at this level for a few months at least, while the RBA assessed the effects of its actions.

Senior Commonwealth Bank economist Michael Workman said the RBA would probably keep rates on hold for a few months, as higher interest rates were already dampening spending.

In the longer term, the bank is expected to lift rates to control inflation stemming from the China-led mining boom.

Most economists forecast an increase of half a percentage point by the end of the year.

But markets are betting on a rise of quarter of a percentage point as investors fear Europe's debt crisis could derail the global recovery.

Since October, the monthly cost of repaying a $300,000 mortgage has increased by $235.

Meanwhile, the RBA is warning that a failure to build enough houses to keep up with population growth could unleash a speculative boom, causing economic instability.

The bank's head of financial stability, Luci Ellis, said the number of new houses was lagging well behind a recent surge in population, pushing up prices.

Dr Ellis said the shortage could lead to price growth that became built into buyers' expectations.

”If price expectations become over-optimistic and encourage too much investor demand, the result could be disappointment – or worse,” she said at a housing conference in Sydney.

In the three months to March, house prices in the big cities jumped by a yearly rate of 12 to 15 per cent, raising fears of a housing bubble.

Dr Ellis said further price surges could threaten household spending.

”The more that housing prices rise, the more that some people might feel that they must stretch their finances to buy a home,” she said.

”And if household balance sheets were to become overstretched, household spending would become overly sensitive to income shocks.”
SOURCE: Clancy Yeates – Sydney Morning Herald