CBA flags rate rise: Economy round up

The Commonwealth Bank has become the latest major Australian financial institution to foreshadow that it may be forced to increase interest rates because of volatility on international financial markets.

CBA head of retail banking Ross McEwan reportedly told an investor briefing on Thursday that the bank is “not too far off” lifting variable mortgage interest rates in order to offset the increased cost of borrowing that it now faces on financial markets.

The widening impact of the sub-prime crisis in the US has made interbank lenders more risk averse, effectively pushing up the cost of doing business for all financial institutions – whether they have any direct exposure to the sub-prime loans or not.

Although CBA is not the first bank to flag a possible interest rate hike in response to the sub-prime crisis, McEwan said he wouldn’t wait for other banks to move if the need to lift rates becomes more pressing. “I am prepared to lead if I have to,” he said.

While house prices are tumbling in the US due to the sub-prime crisis, in Australia we appear to have the opposite problem. According to the Real Estate Institute of Australia, housing affordability in Australia fell to a 22 year low in the September quarter.

More than 36% of the average family income is now required to meet average home loan payments, well above the 30% level above which households are considered to be in mortgage distress.

Australia wide, affordability declined 2.2% over the September quarter and 8.1% for the year, with Tasmania the only state or territory not to see affordability worsen.