Analysts tip interest rates to climb

AUSTRALIANS could be slapped with another interest rate rise ahead of Christmas which would take official rates to an 11-year high.

But for October at least, no rise in official rates is expected.

Economists expect the Reserve Bank of Australia (RBA) to leave official interest rates steady this week after it meets today for its monthly board meeting today.

But strong economic growth at home and growing inflationary pressures could push the central bank to raise interest rates later this year, analysts say.

For many households, that would represent a severe financial strain.

A recent survey by NEWS.com.au and polling firm Coredata found a rise in interest rates of half a percentage point would significantly reduce borrowers' ability to meet their mortgage repayments.

But analysts are betting the RBA will raise rates again later this year or next by at least another 25 basis points.

"I think that there's a still chance of a rate rise in November this year as there still is inflationary pressure but we are still yet to see the full effects of August (sub-prime lending crisis) flow through and the changes to the credit market.," says Denis Orrock, the general manager of infochoice.com.au.

"A lot will depend on what happens in the US and their economy, and at home, inflationary pressures brought on by the drought.

"If we don't have a rate rise this year, that definitely leaves open the chance of a rate rise next year," Mr Orrock said today.

Rates rises relentless

After nine rate rises in five years, interest rates are now at the highest level since John Howard first won office in 1996.

The Reserve Bank last increased rates in August, up 25 basis points to 6.5 per cent. Another rate rise would take official rates to at least 6.75 per cent, which would be the highest since July 1996.

Bill Evans, chief economist with Westpac Bank, expects rates to rise again as inflation pressures build.

"Since the last Board meeting we heard from the Governor who noted further restraint 'would not be unwelcome'. That made it fairly clear to us that the RBA would probably have tightened following the September Board meeting if the credit  market turmoil had not intervened," Mr Evans said.

"We are likely to see continuing evidence of domestic inflation pressures going forward with employment and inflation releases. We continue to see a further RBA rate hike in this cycle."

Mortgage strain showing

The interest rate rise in August boosted mortgage repayments by $33 on a $200,000 loan taken over 25 years at a variable rate of 8.32 per cent.

Another rate rise of 25 basis points would push home loan rates to 8.57 per cent. On a $200,000 mortgage, monthly repayments would rise by about $34.

Australian households are feeling the pinch. The recent survey by NEWS.com.au found nearly half of all respondents said their financial situation was worse than a year ago.

Nearly a quarter of survey respondents said the last four rate rises had made repayments "much more difficult".

The survey of 1530 people found a quarter of lower income earners who were paying off a home used 60 per cent or more of their income on home loan repayments alone.

More than one in eight borrowers, or 13 per cent, thought that their mortgage was worth more than their home. 

Any further rise in interest rates would help to push up the value of mortgages and keep down property values.

Nicki Bourlioufas is the business editor of NEWS.com.au