Two rates hikes in two months meant a sobering end to the year for borrowers, reports Peter Weekes.
We almost made it. But two months before the end of the year the strength of the economy and world recovery finally caught up with us, and the Reserve Bank of Australia had little choice but to raise interest rates, once in November and then again last week. We had gone 17 months without a rise.
Australia's cash rate is now 5.25 per cent, its highest level in more than 30 months - higher than in the United States and much of the rest of the OECD. Still, it is at historically low levels.
The two increases pushed the variable mortgage rate to about 7.07 per cent and spurred a doubling of the number of people taking out fixed loans, but by then it was too late. The best time to fix was in June/July, when the three-year fixed rate was below the variable at 5.99 per cent.
SARS, the threat of terrorism, the weak global and US economy and the fear of deflation in the America meant the US Federal Reserve had to keep its rates low all year. This in turn put pressure on the RBA to do likewise.
Still, as the year progressed and the threat of deflation faded as economies around the world strengthened, talk in Australia turned to the likelihood of a rate rise.
It was sparked midyear, when the RBA warned of an emerging housing bubble.
By mid-October most economists were convinced that rates would rise, but not until December.
The reasoning was straightforward:
the high Australian dollar meant imports were cheaper and therefore keeping inflation in check.
This theory was borne out when inflation for the September quarter came well within the RBA's target range of between 2 and
3 per cent, meaning it would not be a reason for the RBA to move on rates.
When the RBA moved early in November, the market was taken by surprise. Many property owners and investors were shocked, while retirees, with their savings in deposit accounts, felt a sense of relief.
Still, the move had its intended purpose. People began to realise that rates are abnormally low, the exception rather than the rule, and that the only way is up.
Economists expect rates to rise by a further quarter to a half of a percentage point next year.
