Bush launches sub-prime rescue package: Economy round-up

US President George Bush has announced a controversial new plan to stem the tide of sub-prime mortgage defaults in the US.

Under the plan, mortgage interest rates will be frozen for up to five years for some homeowners with sub-prime loans they cannot afford. The move is a response to fears that when millions of step-up clauses in sub-prime loans (which lift rates after an initial discount period ends) take affect, default levels could skyrocket.

The plan has received a mixed response, with some economists raising fears that it will simply delay the problem and reward lenders who were too lax in their lending policies – and borrowers who overestimated what they could afford.

But the market welcomed the plan, with financial stocks driving a 1.3% rise in the US Dow Jones Industrial index to 13,620 overnight.

Good news on US jobs – with 189,000 new jobs in November defying market expectations of a fall – also buoyed market sentiment.

In Australia, an OECD report released overnight says increasing inflationary pressures in the economy will mean the Reserve Bank of Australia will have little choice but to further lift interest rates.

“The tightening of monetary policy should be stepped up further in order to bring growth back to a sustainable pace and contain inflationary pressures,” the OECD says.

The OECD predicts the economy will grow at 4.25% this year before slowing down to only a slightly more modest 3.5% in 2008.

On the markets today, at 12.45pm the S&P/ASX200 is up 0.5% on yesterday’s close to 6635.7 and the Australian dollar is trading at US87.80c, up on yesterday’s US87.26c close.