Finance

Dollar soars on interest rate triple threat

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John Howard and Peter Costello have scrambled desperately to hose down predictions of soaring interest rates after senior banking figures suggested we could see three rate rises before the middle of 2008.

But Howard and Costello’s attempts appear to have been discounted by the markets, with the Australian dollar – which generally lifts on expectations of higher interest rates – bursting through the US91c barrier to a 23-year-high of US91.15c.

New ANZ chief executive Mike Smith reportedly said yesterday that he expected three interest rates rises by May 2008, with the first to come when the Reserve Bank of Australian next meets on November 6.

Three increases by the RBA would see the basic cash interest rate lift to at least 7.25%. But the rate to borrowers could rise even higher, given NAB chief executive John Stewart’s warning during the week that banks would be forced to raise rates to compensate for the international credit crunch, irrespective of any action by the RBA.

Costello and Howard have both been taking great pains to make the case against any rate rise by the RBA or the banks in recent days. Howard yesterday reportedly said that “there is no case based on what has occurred in the United States”, for lifting rates and urged the RBA to take into account prevailing financial conditions in its decision making.

And on hearing the comments by ANZ’s Mike Smith, Costello told The Sydney Morning Herald that “those banks that do will lose market share”, he said. “It won’t advantage them. Who would go and get a mortgage from that bank?”

The hullabaloo appears to be having little affect on the relatively positive vibe on the stock exchange in recent days. The S&P/ASX 200 finished down 0.2% yesterday, thanks primarily to a below expectation profit report from ANZ Bank, but today by 12.25pm it is up 0.8% to 6679.7.

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