Latest NewsRate Reprieve for BorrowersSaturday, 21 January 2017

Borrowers can breathe easy - for a few months, anyway

Borrowers can expect a reprieve from interest rate rises in the next few months, analysts say, after the Reserve Bank gave strong signals that rates are on hold.

After six rises in official interest rates since October, minutes from this month's Reserve board meeting show mortgage rates were back to their long-term average.

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

At the meeting, the Reserve raised official interest rates to 4.5 per cent. Economists said the comments suggested rates would remain at this level for a few months as the bank assessed the effects of its actions.

A senior economist at the Commonwealth Bank, Michael Workman, said the Reserve would probably keep official interest rates on hold for a few months as higher rates were already dampening spending.

In the longer term, the bank is expected to push up rates to control inflation stemming from the mining boom.

Markets are betting that interest rates will rise a further 0.25 percentage points by the end of the year, as investors fear the global recovery could be derailed by Europe's debt crisis. Most economists, on the other hand, forecast an increase of 0.5 percentage points. Since October, repayments on a $300,000 mortgage have risen by $235 a month.

The Reserve has also warned that a failure to build enough houses to keep up with surging population growth could unleash a speculative boom, undermining economic stability.

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

If nothing was done, Dr Ellis said, the shortage could lead to price growth that becomes 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 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 there was no "credit-fuelled speculative boom" at the moment, but further price surges also 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. And if household balance sheets were to become overstretched, household spending would become overly sensitive to income shocks," she said.

The Reserve Bank is urging banks to retain prudent lending standards, particularly for first-home buyers who have a greater dependence on debt.

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