The minutes of the Reserve Bank’s April meeting, released today, indicate higher rates are coming, and faster than economists had forecast.

The RBA began tightening monetary policy in October, raising rates by 25 basis points at five of its last six meetings, including the one in April, to its current level of 4.25%. This lifted the average standard variable mortgage rate from 5.8% to over 7.0%, and raised the borrowing costs on a typical $300,000 home by $240 monthly.

The April minutes show that the central bank hadn’t counted on massive increases in commodities prices, particularly coal and iron ore, back in February when it last assessed the nation’s economy and forecast growth for this year. But those increased commodities prices will now drive Australia’s international trade higher and faster than predicted, increasing income growth, as well.

This pleasant surprise will “pose challenges” for the bank, the minutes say. It also was the main reason for the decision to raise rates in April, as the RBA revises its expectations for both the Australian economy and monetary policy higher.

Another concern discussed in the April meeting, according to the minutes, was the price of housing, which continues to rise despite the higher interest rates because too few new houses are being built. Several reasons for this were cited, including local land usage policies and a lack of funding for housing developers.

The RBA spoke of the April rate hike as “a further step in the process of returning interest rates to more normal levels.” But the discussion makes it seem that the bankers now believe normal levels may not be sufficient.

“’We still see the cash rate at 5.0% by the end of the year,” said John Peters, an economist with the Commonwealth Bank. “But beyond that the bank will move to a contractionary stance.”

Mr. Peters didn’t balk at the prospect of rates hitting 6.0% by the end of next year. Such a rate would push the standard variable mortgage rate to roughly 8.8%, increasing the cost of borrowing for a typical $300,000 mortgage by a further $340 each month.

Source: http://www.theage.com.au/