Interest rates: pre-Christmas pain or happy holidays?

By Stuart Fagg, ninemsn

The Reserve Bank didn’t spare Australians a Melbourne Cup Day rate rise, but homeowners could be off the hook until February.

Rates are now at 3.5 percent after the central bank’s 25 basis point hikes in October and November and most economists expect them to rise further to around 5 percent by the end of next year.

Before this week’s rate rise, many economists had been tipping a rate rise in December.

But if the RBA moves next month, it will make the history books. The bank has never raised interest rates for three consecutive months.

So far, the RBA’s moves have added $82 per month to repayments on a $300,000 mortgage. If rates rise to 5 percent, that will add $338 per month to repayments on the same mortgage.

The bank’s board – a group of economists, academics and businesspeople who decide where rates are going – doesn’t meet in January, so if it decides not to raise rates in December, homeowners will get a three-month stay of execution until the next hike.

What’s changed? The words of Reserve Bank boss Glenn Stevens – a poker-faced man at the best of times – are pored over by economists in the wake of any change to rates and his post–hike statement, which referred to a gradual removal of monetary stimulus, suggested the RBA may not be in a major hurry to move rates again.

Just a couple of words can change economists’ opinions on rates and can mean the difference between financial pain for households and a happier Christmas.

Commsec’s chief economist Craig James believes homeowners are safe until February.

“While the Governor did warn that he wouldn’t be timid in removing monetary stimulus, the Reserve Bank has already lifted rates twice at a time when other central banks are solidly on the sidelines,” he said.

Over at ANZ, meanwhile, economists are also of the view that rates are staying put until February.

“In raising the target cash rate by 25bp today the RBA left the window open for further interest rate rises, but it did not signal that it is likely to be rapidly withdrawing its monetary stimulus,” ANZ’s economists wrote after the decision.

But Bill Evans, Westpac’s chief economist is one who believes the RBA will raise rates again in December, regardless of its language.

“We believe that there will be another hike of 25bp on December 2, prior to the 9 week break before the next meeting on February 2,” he said.

Back in the real world, the latest rate hike is likely to hit the rash of first-home buyers that flooded the market earlier in the wake of increased government incentives hard.

“The rise in rates is likely to hit the price sensitive segments of the market the hardest. First home buyers and low income households will feel the rise the most,” said Tim Lawless of property analysis firm RP Data.

Rising rates are a symptom of an economy performing well. Australia has weathered the global financial crisis better than virtually every other country so whether you like it or not, the fact is rates are on the way up. The only question is whether homeowners get a nasty pre-Christmas shock or not.

Stuart Fagg is ninemsn's finance editor

What do you think? Are you worried about the prospect of more rate hikes? How have the recent rate rises affected you? Have your say by commenting below