The Reserve Bank of Australia has announced that the cash rate has been increased by 25 basis points, taking the official cash rate up to 4.75 percent. The move marks the fourth time in five years that the central bank has increase the cash rate on the first Tuesday in November. However, despite this many economists and analysts have expressed surprise over the decision to increase the rate this year.

Out of twenty four economists that were polled prior to the decision being announced seventeen had expected the cash rate to remain on hold this month. For many the decision to increase the cash rate came as a surprise because of the consumer price figures released by the Bureau of Statistics last week, which showed that in the three months to the end of September inflation had remained in line with the central bank's 2-3 percent target.

The increase in the cash rate is now likely to spark concerns over the knock on effect that this will have for borrowers, and how much home loan interest rates will be increased by banks. At present the interest rates on variable rate mortgages are between 7.24 and 7.51 percent. Officials have said that even if the banks only pass on the official 25 basis point increase it could add nearly $50 to the monthly repayments on a $300,000 mortgage that is being repaid over a twenty five year term.

Whilst many may be hoping that the RBA decision will not have too severe an impact on home loan interest rates from banks senior bank officials have been repeating warnings that in the event of the official cash rate rising the interest rates charges by banks on home loans would also have to increase due to higher funding costs.

The news of the cash rate rise comes at a time when many homeowners may be sorting out their finances for the up and coming Christmas period, and for those that are on variable rate mortgages this is likely to cause particular concern because of the timing. Many may already be struggling when it comes to funding their Christmas purchases after a difficult and turbulent financial year, and any rate rises applied by banks on home loans at this particular time could bring added pressure.

Glenn Stevens, the Governor of the Reserve Bank of Australia, made the announcement about the cash rate increase after the meeting held today, and advised that the new 4.75 percent rate would come into effect as of 3^rd November 2010. He also issued a statement following the meeting.

The statement from Stevens read: 'For some time, the Board has held the stance of monetary policy steady, which has resulted in interest rates to borrowers being close to their average of the past decade. This allowed some time to observe the early effects of previous policy changes and to monitor the uncertain global outlook. The Board is also cognisant of differences in the degree of economic strength by industry and by region. However, the economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity. Looking ahead, notwithstanding recent good results on inflation, the risk of inflation rising again over the medium term remains. At today's meeting, the Board concluded that the balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent.'

http://www.abc.net.au/news/stories/2010/11/02/3055068.htm?section=justin

http://www.rba.gov.au/media-releases/2010/mr-10-26.html

Written by Michael Sanz