Interest rate rise not warranted

HOMEBUYERS can expect their mortgage repayments to rise by an average $50 a month if the central bank raises interest rates tomorrow, as widely tipped by economists.
The Federal Government and business, however, are not convinced a move at this stage is warranted, saying the rate of inflation is still within the central bank's 2-3 per cent target.

The risk of a rate rise comes as the latest Newspoll showed federal Labor increasing its commanding lead over the Coalition Government ahead of the election in October or November.

The Government today continued to argue that Labor state governments are to blame for putting upward pressure on interest rates because they are borrowing too much.

"While the Commonwealth Government will save over $60 billion over the next five years, the state Labor governments will go out and borrow $70 billion over the next five years,'' Treasurer Peter Costello told parliament.

"If you want to see the difference between a Coalition Government and the Labor party - that cannot be trusted with money - you can see it in the states' records between now and 2010.''

After a meeting of its board today, the Reserve Bank of Australia (RBA) is tipped by economists to lift the cash rate by a quarter of a percentage point tomorrow in a pre-emptive strike against renewed inflationary pressures.

But Mr Costello says falling petrol prices, as seen in July, will detract from inflation if this continues over the rest of this quarter, reversing their trend in the June quarter.

Australian Chamber of Commerce and Industry chief economist Peter Hendy says a rate rise would add $1.8 billion of costs to the economy.

But he says he is not convinced there should be a move with inflation within target and against a backdrop of "skittish" financial markets.

Commonwealth Bank of Australia chief economist Michael Blythe said while recent financial market volatility "muddied the waters'', and that unstable markets have occasionally seen the RBA delay a rate change in the past, "we do not expect any delay this time''.

This would be the first rate rise since November last year, and would lift the RBA's cash rate to 6.5 per cent - its highest level since late 1996 - from 6.25 per cent currently, and increase the standard variable mortgage rate to 8.3 per cent from 8.05 per cent.

This would be just one percentage point shy of the level of interest rates when the government first came to power in March 1996, and would mark the fifth rate rise since the 2004 election and ninth since 2002.

The timing of another rate rise could not have come at a worse time for the Government trailing badly in the polls just weeks before an election announcement.

The latest Newspoll gives Labor a 56-44 advantage on a two-party preferred basis, a widening of two points from the previous poll.

State premiers also continued their attack on Prime Minister John Howard for trying to blame them for putting pressure on interest rates, with West Australian Premier Alan Carpenter saying he is running a "dishonest'' campaign.

"As his recent biography revealed, the prime minister is a serial offender when it comes to fiscal mismanagement,'' Mr Carpenter said.

"His use of 'one-off' financial handouts instead of investing in long term infrastructure, especially in WA, has fuelled consumerism and led to pressure on inflation and interest rates.''

source:www.news.com.au