Rates Rise Sparks Warning

Home buyers face extra mortgage payments of up to $40 a month while many businesses will pay more for loans in the wake of yesterday's 0.75 per cent lift in official interest rates.

And the ACTU president, Mr Martin Ferguson, has warned that ``excessive" increases in interest rates could see workers and unions push for higher wages to compensate for the impact on the cost of living.

He said: ``If interest rates go up by excessive amounts then workers are going to put pressure on their unions. We won't be leading the charge; workers themselves will be raising those issues."

But the Treasurer, Mr Willis, said the Federal Government was ``deadly serious" about keeping inflation below three per cent, and warned unions and employers to follow suit - or risk another rise in interest rates to bring them to heel.

The decision to lift official rates to 5.5per cent - the first increase in five years - was a pre-emptive strike aimed at making sure inflation stayed low and strong economic growth was able to continue over the next few years, he said.

Mr Willis said the increase would not jeopardise the still-fragile recovery in business investment because other conditions remained ``exceedingly favorable". There would be no massive turnoff in investment because of an increase in the cost of business lending at the margin, he said.

The lift in interest rates was designed to prevent monetary policy from adding unnecessary momentum to the economic recovery, and to complement the role of tighter fiscal policy through lower Budget deficits, Mr Willis said.

A rise now would avoid more savage increases down the track and keep the lid on housing costs, he said. It would also prevent continued speculation on financial markets.

He said the Government would continue to review the situation but emphasised that there would be no return to the days of the late 1980s when interest rates soared to around 18 per cent.

Mr Ferguson said the rate rise might force workers to seek pay rises through enterprise bargaining. ``In the end (the rate rise) represents an increase in the cost of living," he said.

He said the ACTU would honor its Accord Mark VII agreement with the Federal Government for two safety net increases of $8 a week for low- paid workers who had not received pay rises through enterprise bargaining.

``But if you've got enterprise bargaining, there's no ceiling," he said. ``Workers can negotiate a $10 or $15 improvement in wages with their employers and that's a fact of life."

The sharemarket surged one per cent on news of the rate increase and analysts said the move had given the market renewed direction. The key barometer, the All Ordinaries index, jumped 19.5 points to close at 2059.5.

Yields on the benchmark Commonwealth 10 year bond rallied by a startling 30 basis points to 9.21 per cent. The dollar initially surged to 74.70 US cents, but selling by overseas investors later eroded much of the gain.

Commentators welcomed the rate rise, which they said was large enough to stop damaging speculative pressures of the past the few months in financial markets. They predicted the Government and Reserve Bank would move to lift rates again, either late this year or early in 1995.

But business groups slammed the increase, saying it would add to the cost of investing. ``It will not help at all ... there is no way that it could be remotely positive for investment," the national chief executive of the Australian Chamber of Manufactures, Mr Allan Handberg, said.

Banks are still considering their position in the wake of the rise, but are expected over the next few days to announce a lift in the rates they charge for variable home loans - currently around 8.75 per cent - and business lending.

Depositors, on the other hand, are likely to benefit from higher interest rates on savings.

Most commentators - including Mr Willis and the Prime Minister, Mr Keating - are expecting banks to stop short of passing on the full increase because of strong competitive pressures and the ability of banks to absorb some of the increase through lower margins.

The most likely result is an increase of around 0.5 per cent, which would add between $30 and $40 a month to the repayment cost of an average home loan.

Announcing the interest rate increase yesterday, the Reserve Bank governor, Mr Bernie Fraser, said the move was the ``best guarantee of further increases in jobs and reductions in unemployment".

Inflationary pressures were likely to emerge over the coming year, and action had to be taken now to reduce the risks of overheating and ensuring a more durable recovery, he said.

The shadow treasurer, Mr Costello, said the lift in interest rates and changes to capital adequacy requirements were a ``double whammy" on low-income home buyers who had trouble finding a 20 per cent deposit for their home loans.