Interest rates in the Year of the Rat
Prime Minister Kevin Rudd felt it necessary to comment on the independent Reserve Bank's decision.

"This one will really hurt," he said.

The hurt is said to especially afflict people with home loans.

Retail banks were quick to raise their lending rates on mortgages, business loans and credit cards... most by more than the quarter of one per cent rise in the official cash rate.

They justified the bigger increase by the higher costs of finance stemming from the US sub-prime lending crisis.

That particular dilemma has meant that banks have become nervous of lending to each other, making what money is available more expensive.

But interest rates are falling in the home of the problem, the United States, as the Federal Reserve there scrambles to head off a looming recession.

Australia has the opposite problem...with strong economic growth continuing from the boom in commodity exports.

Australia's growth will be moderated this year by the slowdown in the US, how bad that might be depends on the depth of the US recession if it happens.

So the question being asked is whether the latest interest rate rise was one we had to have.. or whether its one too many.

Its a bit like the famous quip from former Prime Minister Paul Keating that the 1991 recession was the recession we had to have...and it was the last time Australia has experienced a recession

Now with nervous share markets and higher inflation will consumers too get cautious.

There's little sign yet - spending on imports is booming - almost all the nine million cars we bought last year were imported.

Inflation is the Bank's main concern and its running at the top of the Bank's comfrot zone at 3 per cent.

With the latest rate rise its trying to get consumers to save a little more.

After ten increases perhaps they hadn't got the message yet.

But like Kevin Rudd said...this one might hurt. He's responding to the media attention on so-called mortgage stress - where home owners took large mortgages which they might struggle to repay.

But the extent of stress is a bit overstated. A survey published also on Tuesday by Fitch Ratings reported that delinquencies - or missed repayments actually fell in the fourth quarter last year to the end of June.

It said in contrast to market perception and anecdotal evidence, missed repayments are at their lowest level since December 2005. When figures factoring in the latest couple of rate hikes are available it could be the picture might be different.

There are no doubt pockets of financial suffering to exist but in general Australian borrowers are coping with mortgage repayments.

The lowest rate of unemployment in 30 years is helping. The bigger issue for some is simply trying to break into the real estate market for the first time, because the doubling of house prices over the last decade has priced them out of reach.

There's no doubt too that the balancing act now for the Reserve Bank and the Government is about getting the timing and the mix of policy right. And in judging how long the China linked resources boom will keep paying the bills.

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