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Australians brace for the pain of rising inte -

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Broadcast: 03/05/2006

Australians brace for the pain of rising interest rates

Reporter: Ros Childs

KERRY O'BRIEN: Welcome to the program. As rescuers enter the final phase of a desperately tricky
effort to extricate the two trapped miners in Tasmania in what has been a tortuously long day for
all concerned. Drilling only began after nightfall, and we'll cross to Beaconsfield shortly to
explain why.

On the national front, Australians are tonight confronting a new interest rate regime. A higher
one. And while a rise of a quarter of one per cent doesn't sound like much, in a nation addicted to
debt, every cent of that increase in mortgage repayments will be felt in many households across the
country, not to mention the tough environment of small business. It's the first rate rise by the
Reserve Bank for more than a year, but it's been one of the more controversial ones with some
economists questioning the wisdom of pushing up the lending rate at a time of record-high petrol
prices. It's a less than welcome present for the Government from soon-to-retire bank chairman, Ian
Mcfarlane and we'll be looking at the sting in the tail for both John Howard and Kim Beazley. But
first, Ros Childs measures the impact out in the community.

STEPHEN KOUKOULAS, TD SECURITIES: The economy is doing well. We've got inflation pressures
building. Unemployment is low. That's when the RBA has to put rates up.

CRAIG JAMES, COMMSEC: The risk that the economy potentially could go backwards for one quarter.
Certainly we're not expecting a recession to flow from this, but the economy under significant
pressure from a number of sides. Higher petrol prices, higher health insurance costs and now higher
mortgage interest rates.

NENAD NIKOLIC, STORE OWNER: They are having to cut costs in other areas so they are more careful on
what they are spending. They come into the store and look at prices and are working from
week-to-week.

ROS CHILDS: Small businessman Nenad Nicolic here is being hit on all fronts.

NENAD NICOLIC: Since I've been here three years, every year it's become a lot more difficult to run
a small business.

ROS CHILDS: Higher petrol prices were already affecting trade at his shop, The Friendly Grocer on
Sydney's otherwise affluent North Shore. The way he reads it, customers were paying for their more
expensive fuel by spending less with him. Now he expects business to drop off again as locals cope
with higher mortgage repayments and all that as he, too, faces a hike on his own loans.

NENAD NICOLIC: It will affect our repayments on our loan, our business loan. All of our profits are
going towards paying back our business loans, so we've had to - we've been affected by having to
pay more on our debts and we've had to reduce our staff levels.

MATT INGLIS: With a young family I think every spare $10 we have will have to go back into - well,
mortgage or, Education. So, yeah, it's a little bit tough.

ROS CHILDS: For many households a quarter of a per cent interest rate rise is no big deal but for
Georgie Clune and Matt Inglis it hits hard and it comes after they had already decided enough was
enough. Their half million dollar mortgage became too much to manage when this double-income family
suddenly had to rely on one.

GEORGIE CLUNE: We thought we'd be fine because at the time we were both working full-time and it
all just seemed to fit into place for us, but as the time went on I was retrenched and things
became more difficult.

ROS CHILDS: The couple are getting married on Saturday and higher interest rates are the sort of
wedding present they didn't want. The house they put on the market to relieve the financial strain
remains unsold and now they're going to have to pay more each month to live there.

GEORGIE CLUNE: It was meant to have sold about two months ago, but there's not many buyers out this
at the moment because I don't think many other people want to be in the same situation.

ROS CHILDS: Homeowners are the obvious casualties of an interest rate rise. Today's rate rise means
that on a 30-year loan being repaid at a new rate of 6.87%, people with a mortgage of $250,000 will
now be paying out an extra $41 each month. Those who owe $400,000 will have to find another $66 a
month and repayments on a half million dollar mortgage will rise by $83 a month. Interest rates
control the economy. They govern people's decisions to borrow or save, buy or sell. It's the
Reserve Bank's job to keep inflation in check, putting rates up to cool things down if the economy
starts overheating. The Central Bank tries to move pre-emptively striking before the iron gets too
hot and for the past 14 months the board has left well alone. But today it moved. And economists
are divided about whether the Reserve Bank has made the right decision. Craig James of Commsec
questions its timing, unsure whether consumer also be able to cope with the extra financial burden.

CRAIG JAMES: Certainly we have reservations that the Reserve Bank is moving at this time. The risk
is that the economy could soften more than what the Reserve Bank expects. The consumer spending was
a little bit more fragile than the Reserve Bank had had assumed.

ROS CHILDS: Others, though, believe the Reserve was right to act now.

STEPHEN KOUKOULAS: We know that actual inflation is starting to accelerate and in that sort of
climate the Reserve Bank needs to be withdrawing some of the stimulus that's in the economy.

DAWN SMITH, LIFELINE: For families and people who are already struggling financially, an increase
or the increase in interest rates will have a significant effect. There's no question about that.

ROS CHILDS: Dawn Smith is the CEO of Lifeline, a 24-hour telephone counselling service. She says a
lot of people are already financially overstretched and expects today's rate rise to keep
Lifeline's debt counsellors busy in the weeks ahead.

DAWN SMITH: Our experience is particularly with our financial counselling services we are seeing
unprecedented demand for those services. We are experiencing that long waiting list for the first
time in a long time for people to get financial counselling. So I expect an increase of this nature
is likely to continue to increase that demand on services.

ROS CHILDS: For grocer Nanard Nicolic there's not much choice. To cope with the added financial
burden he'll have to pass on his higher costs to his customers.

NENAD NICOLIC: There's a lot of customers and handicapped people in the area and we usually do
deliveries for them. We have to charge them a little bit more on delivery fees now because of our
costs. So it's a little bit difficult to have to charge someone who's already on a fixed income,
but we have to do it. It's for all of us to survive.

CRAIG SMITH: This is a major hit for Australian consumers, but the good news is wages have been
increasing and the job market is strong. That's unlikely to change too much in coming months. So
there are some positives to offset the negatives. But, not too many positives.

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