Reserve Bank warns of double interest rate rise

CONSUMERS have been warned there will be no escaping an interest rate hike next month - and it could be a double whammy.

CONSUMERS have been warned there will be no escaping an interest rate hike next month - and it could be a double whammy.

Explosive documents released yesterday showed the Reserve Bank Board almost went for the shock treatment earlier this month as it battles to control inflation.

Leading economists said yesterday there was a big chance the central bank would push up rates by half of a percentage point next month – double the usual increase. This would ramp up monthly repayments on a $300,000 home loan by $100.

It will also lift standard variable rates on home loans to almost 10 per cent and add to the misery of many homebuyers.

The Reserve Bank normally raises rates by only a quarter of a percentage point but this tradition could be overturned next month.

"Not only does this shore up the case for a hike in March, but it suggests a more aggressive move might be needed," Macquarie Bank's Brian Redican said.

No end to rate-rise risks

There were more danger signs yesterday when the Reserve's assistant governor Malcolm Edey warned inflation would almost hit 4 per cent in the next quarter.

The last time the Reserve Bank ordered a half a percentage point rise was eight years ago. If rates do rise by the bigger amount it will take take the cash rate to 7.5 per cent – the highest level since 1995.

Interest rates have jumped 11 times in the past six years, plunging Australian families into mortgage stress.

Federal Treasurer Wayne Swan told Parliament that the Rudd Government was working with the Reserve Bank and remained "committed to putting downward pressure on inflation and downward pressure on interest rates".

Prime Minister Kevin Rudd again tried to shift the blame, saying his Government inherited an economy with underlying inflation running at a 16-year high.

Economy strong

But Opposition Leader Brendan Nelson maintained the economy was in "first-rate shape" when the Coalition lost office late last year.

Under new independence rules, the Reserve Bank for the first time yesterday released the official minutes of its February 5 board meeting.

The document showed the board was very close to raising rates earlier this month by half of a percentage point.

The minutes said "there was a case for the board to send a stronger signal of its intention to act as necessary to reduce inflation".

In the end the bank decided on a smaller increase, although it warned it would continue to review the policy.

The Reserve Bank will meet again on March 4.