As was widely expected, the Reserve Bank of Australia (RBA) again raised the Official Cash Rate (OCR) this week by 0.25 per cent to six per cent - the highest since early 2001. This in turn is likely to raise the average home loan repayment by around $35 per month.
In his Statement on Monetary Policy, RBA Governor Ian MacFarlane said that strong demand for finance over the past few months indicates that households and businesses have continued to find it attractive to borrow at recently prevailing interest rates.
"Compression of lending margins over recent years has contributed to a lowering of borrowing costs relative to the cash rate. This has meant that although the cash rate has recently been slightly above its average for the low-inflation period since 1993, interest rates paid by borrowers have remained below average," Mr MacFarlane said.
Given that the latest consumer price index showed inflation surging 1.6 per cent in the June quarter on the back of high fuel and banana prices and inflation is now running at four per cent - well above the Reserve Bank's target range of two per cent to three per cent, the Board judged that "an increase in the cash rate was warranted in order to contain inflation in the medium term."
