Making money

Published in the Sunday Telegraph, March 2010 by Andrew Carswell

In the face of conflicting economic data, the Commonwealth Bank has given homeowners a stark warning that they should prepare for a much steeper rise in interest rates than had been widely anticipated.

CBA economists last week forecast the Reserve Bank would raise its cash rate to five per cent by Christmas and 5.5 per cent by the following Christmas, bucking the views of commentators who had begun moderating such predictions..

The CBA's vice-president Madeleine Bertelli told a Committee for Economic Development of Australia briefing last week that homeowners should prepare for the worst-case scenario.

"We expect the cash rate to be about five per cent by the end of this year," she said.

The predicted rate is 0.5 per cent higher than that forecast by CBA chief executive Ralph Norris in November when he tipped official interest rates would reach 4.5 per cent by Christmas, 2010.

Economists had largely scaled back their forecasts after receiving anecdotal evidence suggesting economic growth in the December quarter was sluggish at best.

It was those same fears, coupled with the lack of information on the effect last year's three consecutive interest rate rises had on homeowners that prompted the Reserve Bank to keep its cash rate on hold in February.

However, with the release this week of strong gross domestic product figures that showed the Australian economy was growing at a surprisingly high 2.4 per cent annual rate, the pressure is now back on the RBA to speed up its plan to take its cash rate back to the more historically safe level of five per cent to prevent the onset of high inflation.

It began on Tuesday, lifting its cash rate 0.25 per cent to four per cent, a hike aped by the major banks to the cash rate than was the case prior to the global financial crisis, the normal level for the cash rate is around 4.5 per cent to five per cent."

Renewed optimism on equity markets will also give the RBA impetus to hike rates.

It is exactly one year since the Australian share market reached rock bottom at the depths of the financial crisis.

A year ago the entire globe was mired in unmitigated pessimism, with countless commentators pronouncing the arrival of the second Great Depression.

Since that frightening period, the local share market has rallied 53 per cent not quite as much as the 66 per cent recovery on US markets, but nevertheless quite spectacular.

Growth in 2010 has so far been relatively flat and marked by volatility, a factor which Dale Gillham, chief analyst at Wealth Within, believes will soon give way to more sustained growth.

"Given the recent strength of our market, I'm reasonably confident we've seen the yearly low, which means the market will now move up into June or July to between 5000 and 5200 points and possibly beyond," he said.

"The market isn't likely to rise as fast as it did last year from March to June, so don't expect stocks or your portfolio to repeat the performance seen in 2009."

AMP Capital chief economist Shane Oliver said it was clear the RBA had a long way to go to return rates to more "normal levels".

"The December quarter GDP data showing growth coming in much stronger than expected through 2009 as a whole and running above trend last quarter certainly supports the case that the RBA has more work to do in getting interest rates back to 'normal levels," Mr Oliver said.