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Continued inflationary pressure caused largely by wages growth and low unemployment means that Australians need to get used to the prospect of higher interest rates. Not only do we have to worry about the Reserve Bank increasing rates to combat inflation, there is also the very real threat of lenders independently raising rates because of the global credit crisis.
The Reserve Bank of Australia (RBA) warned in a statement on monetary policy released mid November that it can't see inflation dropping below 3% until 2009. Even then it is expected to linger between 2.75% and 3% which is at the top of the Reserve Bank's comfort band of 2 to 3 per cent. Australian Bureau of Statistics Data released today has shown that twice as many jobs were added in November as initially forecast by economists. Qantas airways is looking to hire a further 2,000 people after expanding its fleet of aircraft. Companies in the resources sector such as Rio-Tinto are also hiring because of continued growth in exports to expanding economies such as China and India. This shows that Australian companies are still very much in hiring mode. Skills shortages in the resource sector are also driving wages up and putting more upward pressure on inflation. Alan Olster chief economist at National Australia Bank said that if this skills shortage continues to drive wages up the RBA will be forced to increase the official cash rate to 7% in February. If an RBA rate rise in February isn't enough to worry about Australia's big four banks have claimed that they are losing about $600 million per year by not passing on to customers their higher funding costs caused by the global credit crisis. The subprime mortgage crisis in the USA has seen major reductions in liquidity in global credit markets. Some of the worlds largest lenders have written off many billions of dollars in bad debts. Because of nervousness in the markets banks are tending to hoard their cash. This means that banks are now less likely to lend and invest their surplus cash to other banks that can use these funds to provide mortgages. Supply is short, demand is high and as a result wholesale funds for mortgages have increased. JP Morgan said that wholesale borrowing costs are 90 basis points above where they were last July. Commonwealth Bank, ANZ, National Australia Bank and Westpac have all alluded to an increase in their standard variable interest rates independent of an RBA increase. Commonwealth Bank has been the most outspoken about it with the head of retail banking Ross McEwan saying it's not too far off and they are prepared to lead if they have to. By not passing on a 25 basis point increase to customers Commonwealth Bank's annual profit would fall by approximately 2.32% or $122 million, ANZ by 3.58% or $152 million, National Australia Bank by 3.84% or $181 million and Westpac by 3.46% or $134 million. 
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