Honeymoon over for mortgage holders

The Reserve is done cutting rates, members of our expert panel say. Source: AP

MORTGAGE holders have enjoyed their last interest rate cut and should brace for rising rates in the coming year, according to News Limited's shadow Reserve Bank board.

No change is expected when the real Reserve Bank announces its monthly decision today at 2.30pm.

But a majority of our nine-member expert panel believe the Reserve is done cutting rates.

At 5.65 per cent, the discounted mortgage rate is at its lowest in half a century, excluding the Global Financial Crisis, as the Reserve Bank seeks to engineer a recovery in non-mining parts of the economy.

It's working, according to the chief economist of HSBC Bank Australia, Paul Bloxham, who believes a pre-Christmas rate hike is on the cards, followed by another rise early in the New Year.

"Low interest rates are supporting the economy, including improvements in consumer sentiment and the housing market,'' Mr Bloxham said.

An economist for the Eureka Report, Adam Carr, thinks rates should be increased by a quarter of a percentage point today and by another full percentage point over the coming year.

"The Reserve Bank cut interest rates too aggressively last year. None of the dramas they, and others, said would happen, did. Instead the economy got stronger and the outlook is great.

''While there are no signs the inflation genie is out of the bottle, as the high Australian dollar keeps a lid on inflation and activity, economists increasingly think the need for ultra-low rates has passed.

"I think all we're doing is setting ourselves up for inflation down the track. We don't need rates this low," Mr Carr said.

A strong lift in house prices, recovery in global growth and recovery in consumer confidence has raised the risk that rates could rise a full percentage point in the coming year, according to the managing director of Market Economics, Stephen Koukoulas.

"Consumers appear poised to boost spending," he said.

And the mining boom is not over yet, according to the Airport Economist, Tim Harcourt.

Traveling in South Korea, Mr Harcourt sees signs of a pick up in Asian trade.

"I just visited POSCO the world's largest shipyard - and it is going gang busters - dare I say it 'Gangnam Style','' he said.

Mr Harcourt says fears about the impact of the Cyprus deposit tax are overblown.

"Australia exports more to Christmas Island than we do to Greece let alone Cyprus.''

But others are not so sanguine.

Shadow board member Stephen Kirchner, a research fellow at the Centre for Independent Studies, expects financial market turmoil will prompt further rate cuts of half a percentage point in the coming year.

"The imposition of capital controls and financial repression in Cyprus highlights the downside risks that remain in the euro zone,'' he said.

The chief Australian economist at Bank of America Merrill Lynch, Saul Eslake, also thinks there's room to cut further.

Annette Beacher, an economist at TD Securities, believes the Reserve Bank must keep interest rate cuts on the table to keep pressure off the Australian dollar. "The Aussie dollar remains elevated and the Reserve Bank dropping its easing bias would only fuel further appreciation.

''A high dollar hurts activity in manufacturing and tourism, meaning lower rates may be needed to stimulate activity.

Controversial economist Steve Keen is standing by his call for interest rates to be cut by a full percentage point in the coming year to bring down the value of the Aussie dollar.

"We have to get the Aussie dollar down,'' he said.

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