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http://www.news.com.au/dailytele ... 562-5013110,00.html

More rates agony

AUSTRALIAN homeowners and investors are facing more interest rate misery after the near collapse of American banking giant Bear Stearns yesterday.

The US investment bank had to be given an emergency loan by rival JP Morgan, backed by the Federal Reserve, after it effectively ran out of cash becauseof a massive fall in the value of its investments.

It had invested heavily in instruments linked to poor-quality mortgages in America, where defaults are soaring and house prices have fallen 12 per cent from their peak.

As a result, the value of its investments plummeted.

The news is likely to mean more rate hikes by Australian banks - independently to any RBA announcements - as they try to preserve their profits in the face of spiralling funding costs.

Rory Robertson, interest rate strategist at Macquarie Bank, said: "Banks raise about half of the money they need from the wholesale markets, so they are directly exposed to events in the US. It's certainly possible we will see major banks raise rates again.''

The banks have already topped up the RBA's quarter-point rise by an average of 0.15 per cent in January and by another 0.10 per cent this month.

"Lots of credit analysts are saying the cost of funds is rising by much more than that, so the banks may feel the need to raise rates again,'' Robertson said.

"It's hard because households have already been hit by the biggest financial shock in 15 years - with rates up by 1.25 per cent in just seven months. That's a lot to swallow.''

Only last week the banks passed on more than the quarter-point rise announced by the RBA this month.

ANZ, Commonwealth Bank and St George all passed on 0.35 per cent rises to mortgage customers, while Westpac hiked its rates by 0.3 per cent and NAB by 0.29 per cent.

Investors also face a rocky week ahead, as fall-out from the Bear Stearns debacle prompts more panic selling.

Nigel Littlewood, of the stockmarket newsletter The Rivkin Report, said: "There's more of this bad news to come, and everybody knows it. The problem is, nobody knows when it will stop.

"As long as there's uncertainty out there, it will be very difficult for shares to rise.

"A lot of carnage is already priced into the stock market, but there's so much fear around, it doesn't take much to spook the market even more.

"The shock of such a big name falling victim to the credit crunch will probably drive stocks lower.''

Global stock markets are already 10 to 20 per cent down as a result of the credit crisis.

The local market is down 25 per cent from its peak, with popular bank stocks - the staple of most super funds - down 35 per cent.

Whatever action is taken by the banks of their own volition, economists say the Reserve Bank is unlikely to raise rates again because the economy is already showing signs of slowing.

This should bring inflation back within the Reserve Bank's two to three per cent target range.

Some economists are forecasting a sharp economic slowdown and even a recession in Australia as a tide of adverse economic forces hit our shores.

A combination of rising interest rates for homeowners and businesses, a drop in consumer spending and falling exports because of our strong dollar - and America's economic slump - could all lead to a much more severe slowdown than the Reserve Bank had intended.

AMP chief economist Shane Oliver said: "I think the RBA has overdone it. It should have waited to see the effect of the previous rises before hiking rates again.''

The pain of 12 successive rate rises is now clearly visible. House prices in Sydney are flat or falling in many areas, activity at auctions is slowing and last week consumer confidence fell to its lowest level in 15 years, according to the Westpac-Melbourne Institute study.