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Peter Ryan discusses expected rate hike -

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Peter Ryan discusses expected rate hike

AM - Monday, 3 March , 2008 08:04:00

Reporter: Peter Ryan

PETER CAVE: As we have just heard, there's little doubt that more interest rate pain is on the way
with the Reserve Bank expected to vote for another rise of a quarter of one per cent tomorrow.

I'm joined in the studio now by our business editor Peter Ryan.

Peter, the big banks raised interest rates independent of the Reserve Bank earlier this year. Will
we see that again tomorrow?

PETER RYAN: Peter, that scenario is becoming more likely, given that the cost of money is now at a
15 year high because of the global credit crisis.

And you'll recall the Commonwealth Bank outraged the Federal Government a month ago when they added
a margin to the RBA's February increase of 0.3 or one per cent. And that's on top of independent
increases all four of the big four made in January, the only month of the year when there's no RBA
meeting.

But, the Commonwealth Bank in particular has been softening up customers and of course the
Government over the last few weeks, repeating the mantra in public and behind the scenes that banks
continue to bear more pain than is commercially viable.

So, all the banks major in second tier have refused to rule out independent hikes, which in a way
makes the Reserve Bank's battle to control inflation easier.

PETER CAVE: What are the chances that the Reserve itself will go beyond a quarter of one per cent
to ram home the message?

PETER RYAN: Some economists have raised the scenario of something tougher or more direct in the
form of half of one per cent, and if you look back at the last time rates move near this level, you
have to go back to December 1994 when rates were raised by a full one per cent to 7.5 per cent to
control inflation.

Now, while that strategy is unlikely for tomorrow, the RBA's minutes show it was considered when
they raised rates last month. And it seems the only thing that stopped the board from a harsher
hike then was the independent action by the banks. But at the minimum, markets are factoring at a
hike tomorrow and perhaps another two this year: April, then a follow up in May.

PETER CAVE: Peter, it's a fairly big week for economic data this week isn't it?

PETER RYAN: Yes, we have around a dozen key economic indicators out, but the standout is the
national accounts on Wednesday which should underline the RBA's decision.

This is expected to show growth of 0.8 of one per cent in the December quarter, taking the annual
rate down from 4.3 to 3.8. While this isn't easing, it's unlikely to impress the Reserve Bank
though, which is looking for a significant slowing of demand to trim back inflation.

PETER CAVE: There hasn't been good news in the United States this morning. What's that going to
mean for the sharemarket today?

PETER RYAN: Wall Street plunged 2.5 per cent on Friday, US time, amid more concerns about the
strength of the US economy. This adds up to the case that the US is unlikely to avoid a recession
and might already be in one. So, expect an ugly start here and the Australian market could open as
much as a 150 points weaker.

PETER CAVE: Our business editor Peter Ryan.