Double digit interest rates 'within months'

HOME loan rates are set to hit double digits and push 10 year highs if bearish predictions by ANZ come true.

Double digit interest rates 'within months'

Standard variable home loan rates are set to rise into the double digits, and the highest levels in more than 10 years, if bearish predictions by one of Australia's biggest banks come true.

ANZ Banking Group Ltd has forecast the central bank to lift official interest rates two more times in the second half of this calendar year.

A hike of 25 basis points is expected after the Reserve Bank of Australia's (RBA) August board meeting, followed by another in November, the bank said after reviewing its key economic projections.

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This would lift the official cash rate to 7.75 per cent by the end of 2008, the highest level since November 1991, from a current 7.25 per cent.

The commercial banks are expected to pass on the rises, which could push the average standard variable home loan rate of 9.50 per cent up to 10 per cent or more.

Inflation figures would trigger rates

ANZ said the trigger for a rate hike in August would be a rise in second quarter inflation figures, due to be reported in late July.

The case for a November rate hike is being built on rising inflation expectations in the community that may result in higher wage outcomes.

"We expect the RBA to increase the cash rate by another 50 basis points over the second half of 2008," ANZ co-heads of economics and interest rate research Warren Hogan and Sally Auld said in a client note.

The nation's third biggest bank had previously expected the official cash rate to remain on hold for the rest of the year.

"New information over the past two months points towards stronger growth and higher inflation outcomes over the year ahead," Mr Hogan and Ms Auld said.

ANZ is tipping core or underlying inflation to peak at an annualised 4.9 per cent in the September quarter, following a rate of 4.5 per cent in the June quarter.

"Although the economy is showing signs of slowing, a broad based inflation pressure has emerged in Australia in 2008," Mr Hogan and Ms Auld said.

"(This) risks undermining the RBA inflation target and entrenching unsustainably high inflation expectations."

The RBA targets an inflation band of two to three per cent over the course of the economic cycle.

'Home owners should be able to cope'

Mortgage Choice national corporate affairs Manager Warren O'Rourke said home owners should be able to adjust to further interest rate rises.

"Obviously they are not spending as much as they realise that the interest rates are eating into their household budget," Mr O'Rourke told AAP.

"They will just re-adjust their household budget to ensure they can continue to make their repayments."

He said upcoming Federal Government tax cuts would provide some relief for home owners.

But his reading of the market did not suggest another round of hikes was on the way.

"They may well be right, but it's not necessarily the way that we would read it," Mr O'Rourke said.

AAP economist Garry Shilson-Josling said there was "nothing implausible" about the ANZ forecasts.

"The March quarter figures showed annual growth of five per cent or more for 50 per cent (by weight) of the items in the consumer price index, so it's clear the rise in inflation is broad based and not confined to just one of two items," Mr Shilson-Josling said.

The March quarter annualised underlying and consumer price index inflation rates were both 4.2 per cent.

Financial market economists currently believe just one more hike is likely in the second half of this year, in August.

The RBA has forecast annualised underlying inflation to clock in at 4.25 per cent by the end of June before easing to four per cent by the end of 2008.