Borrowers to feel more rate pain this year

AAP-May,17-Borrowers should expect a rate rise by August as the central bank acts to control upward pressures on prices.
As the Reserve Bank of Australia (RBA) leans towards tightening monetary policy, Treasury Secretary Martin Parkinson has pointed to a contraction of macro-economic policy already under way to return the federal budget to surplus.
At the central bank's latest board meeting, members agreed the RBA's duty was to manage the whole economy despite several sectors doing it tough, according to minutes of the May 3 meeting released on Tuesday.
"Members noted that the significant divergences between different sectors of the economy presented challenges for policy-making, but that monetary policy had to be set for the needs of the overall economy," the minutes said.
"In this respect, members judged that if economic conditions continued to evolve as expected, higher interest rates were likely to be required at some point if inflation was to remain consistent with the medium-term target."
While financial markets price in a quarter of a percentage point rise in the cash rate to 5.0 per cent by December, most private-sector economists expect the RBA to move by August.
This would add around $50 a month to an average mortgage of $300,000 over 30 years.
JP Morgan economist Helen Kevans said the RBA was likely to lift the cash rate in August following the release of inflation data in late July.
Inflation surged in the March quarter following the natural disasters, and the RBA would await to see whether the rises in prices had subsided subsequently, Ms Kevans said.
"By delaying a rate hike until August, the RBA staff also would have the opportunity to explain the decision to hike in the quarterly statement that follows the August Board meeting," she said in a statement on Tuesday.
"Waiting, though, carries risks - the RBA may be forced to be more assertive later in pushing the cash rate further into restrictive territory, given the even larger terms of trade and mining investment booms."
The other arm of financial policy - the government's fiscal stance - was already in a tightening cycle, Dr Parkinson said on Tuesday.
Treasury has forecast the underlying cash balance will move from a $49.4 billion deficit in 2010-11 to a $3.5 billion surplus two years later.
"As the budget indicates, the proposed fiscal consolidation between 2010-11 and 2012-13 amounts to almost four per cent of GDP - the fastest consolidation in the 40-plus years for which comparable data is available," he said in his first post-Budget speech at an economists' lunch in Sydney on Tuesday.
Dr Parkinson said the pace of the government's return to surplus in conjunction with higher interest rates and a stronger Australian dollar placed the national economy in an "interesting situation".
"My own sense is that doing significantly more to tighten fiscal policy in the short run would inject another risk - that of slowing the economy excessively - and could undermine the prospects for achieving the promised fiscal consolidation," he said.
Opposition treasury spokesman Joe Hockey will deliver his reply to the budget in Canberra at the National Press Club on Wednesday.