Author: PETER MARTIN
Date: December 9, 2009
Source: theage.com.au

LEADING economists have forecast a rebound in Australia's economic growth rate that will force another series of interest rate rises, adding at least $300 a month to the cost of servicing an average home loan by 2011.

A week after the Reserve Bank imposed its third official rate rise in as many months, a survey of economists has predicted a lot more pain ahead for Australian borrowers.

The economists expect that growth will rebound to 3.2 per cent next year, and that the Reserve Bank will respond by pushing up its cash rate from 3.75 per cent to 4.75 per cent, and then to 5.5 per cent in 2011.

These moves, if passed on in full, would lift Westpac's standard variable mortgage rate from 6.76 per cent to 7.76 and then 8.51 per cent.

National Australia Bank's would go from 6.49 per cent rate to 7.49 and then 8.24 per cent.

The extra monthly repayment on a $300,000 mortgage would amount to $190 next year and $340 by 2011.

But the predictions, contained in a survey of the executive committee of Australian Business Economists, may yet understate what borrowers face over the next couple of years.

Reserve Bank governor Glenn Stevens, speaking at the Australian Business Economists' annual forecasting conference, warned of higher rates still as banks widen their margins to comply with proposed new capital rules designed to make them safer.

''The intention, after all, is that lenders will operate with more capital against the risks they are taking,'' he said.

He said both borrowers and depositors of banks and other financial institutions would pay via higher ''spreads'' between what lenders pay for funds and what they charge for loans.

The proposed rules are outlined in a discussion paper sent to financial institutions by the Australian Prudential Regulation Authority. They are not yet in place and so cannot be used to justify Westpac's outsized 0.45 point rate rise last week.

Treasury executive director David Gruen told the conference the resilience of the economy had been underestimated in the May budget, but that without its $37 billion stimulus packages, Australia would have been in recession in the December, March and June quarters of the past financial year.

Responding to critics of the stimulus strategy, he said Australia had achieved a ''radically better outcome'' than other advanced countries through its actions.