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Interest rates head upwards

INTEREST rates will peak at a higher point than originally expected because of increased buoyancy in the economy.

This is the prognosis of Westpac general manager, economics Bill Evans.

Mr Evans believes interest rates could climb 1.5 per cent in three increments of 0.5 per cent to peak in June 2000.

By June 2001 interest rates should be on the decline again, he said.

“The changes by the Reserve Bank will see monetary policy move from the current expansionary stance to mildly contractory,” Mr Evans said.

In November, Mr Evans said he expected interest rates to climb by only 0.75 per cent during the first six months of 2000 in increments of 0.25 per cent.

Westpac now expects the first 0.5 per cent increase in rates to come on 2 February with other increases to follow on 5 April and 7 June.

Mr Evans also sees the US Federal Reserve as increasing its rates over the same period but by lower increments.

This will cause a situation where the Australian cash rates will be 0.25 per cent above the US rates compared with the current situation where Australian rates are 0.5 per cent below US rates.

Complicating the picture will be the tax cuts associated with the introduction of the GST, he said.

“The average mortgage size for Australians is $120,000. A 1 per cent increase in that mortgage rate would increase average weekly mortgage rates by only $20.

The tax cuts forming part of the GST package will typically average $40-$50 per week for families.

Mr Evans believes there are other pointers which indicate a more aggressive cycle than first thought.

Employment is strong, Y2K fears have been put to bed, consumer spending remains healthy and housing demand looks set to continue.

Perhaps most importantly, world growth prospects have improved.

The employment outlook for Australia has improved further, whilst productivity growth seems to have peaked, Mr Evans said.

“We expect that the real drivers of the growth outlook will be consumer spending, housing, exports and (recovering) business investment.”

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