Australian Financial Shock: Home loan rates tipped to hit 8.6%

TheAge.com.au

AUSTRALIANS are being told to brace for much higher interest rates - the OECD predicts at least four more rises, and most likely five, in the year ahead.

The organisation's Economic Outlook, which was released in Paris yesterday, predicts the Reserve Bank will push up its cash rate from its present 4.5 per cent to 5.1 per cent by December and then 5.7 per cent by next June.

Australia's cash rate at the time would be one of the world's highest, exceeded in the the OECD by only Turkey, Poland, Mexico and Iceland.

The prediction is sharply at odds with that of Australian financial markets, which have priced in a tightening of only 0.25 percentage points in the year ahead.

The 120-point increase would push up standard variable mortgage rated from their present average of 7.4 per cent to 8.6 per cent, adding an extra $238 to the monthly cost of servicing a typical $300,000 mortgage and $318 to the cost of servicing a $400,000 mortgage.

The total extra costs since rates began climbing from their lows last October would be $540 a month for a $300,000 loan and $720 for a $400,000 loan. The increase would bring mortgage rates back to the high of 8.55 per cent reached when the Coalition left office but would leave them short of the peak of 9.6 per cent reached under Labor before the Reserve Bank began a series of cuts in response to the global financial crisis.

The OECD identifies Australia and Poland as the only two of its 30 members to have avoided a recession during the crisis. It is optimistic about a sharp rebound in Australia's economic growth, saying its ''dynamism does not seem to have slackened at the beginning of 2010''.

''The business climate and business confidence are strong. Firms have significantly expanded their investment plans, particularly in the mining sector, where strong demand from Asian countries has led to marked improvement in the terms of trade and higher profits,'' the report says.

Although the report is silent on Australia's plan to tax so-called mining super profits, it recommends new taxes on financial institutions across its 30 members big enough to collect ''2 to 4 per cent of gross domestic product over the long term''.

Before the release of the report the OECD secretary-general, Angel Gurría, told the ABC the mining tax was one of ''a number of preferred ways in which we like to see tax structures work'', adding that ''whenever there is a price spike it is legitimate for a sharing of that bonanza''.

The report describes the increase in Australian real estate prices as ''marked'' and says it leaves Australia with the highest house prices relative to income of any member other than New Zealand.

It expects demand for Australian real estate to remain strong ''bolstered by immigration''.

''The current tightening of monetary and fiscal policy is welcome given the rebound in activity'', it says, warning that rising confidence and more favourable terms of trade might require ''a more rapid tightening of monetary policy'' than it has forecast.

It expects Australia's economy to grow by 3.2 per cent and 3.6 per cent this year and next, well above the average OECD forecasts of 2.7 and 2.8 per cent.