Interest rates on hold to next year

• RBA keeps rates at 4.5pc in October
• Will hike next year, economists say
• Mining boom could add $250 a month

INTEREST rates may stay on hold until next year after the Reserve Bank's shock decision yesterday to keep rates on hold.

Economists, however, cautioned that home borrowers may be paying an extra $250 a month on average mortgage repayments by the end of next year as a booming mining sector leads to higher interest rates.

Reserve Bank governor Glenn Stevens surprised rate watchers and sent the dollar sliding as he declared the official cash rate of 4.5 per cent still was "appropriate for the time being".

The decision to leave interest rates on hold for the fifth month in a row means monthly repayments on an average $300,000 standard variable home loan will stay at $2070 - if banks do not gouge borrowers with a rate rise outside the Reserve decision.

Mr Stevens made it clear the next rate move would be up, saying it was likely higher rates would be needed "at some point" to control inflation. Some pundits said the Reserve Bank may hold off until February.

ANZ senior economist Katie Dean described the decision as "a genuine shock" after the RBA's "very hawkish" commentary. "What they're telling the market is they are quite happy with how the economic outlook is evolving in the short term and they're not going to be in any rush to tighten policy, despite the fact they've indicated rates have got to rise at some stage," she said.

"I think this diminishes the chance of a rate rise in the next couple of months."

Citigroup chief economist Paul Brennan said a ramping up of the "mining investment boom" would drive the cash rate to 5.75 per cent by the end of next year. Under that scenario, monthly repayments on an average mortgage would climb by more than $260 to $2330.

UBS interest rate strategist Matthew Johnson said the consumer price index inflation number this month would be lower rather than higher, meaning it would not be a trigger for a rate rise next month. "If that's the case, we could be looking at the RBA being on the sidelines until next year," he said.

NAB group chief economist Alan Oster expected another rate rise before Christmas, but the CPI number and job data would determine if the central bank moved in November or December.

In the wake of last week's disappointing housing and credit data, Mr Stevens, in his accompanying statement yesterday, said asset values were "not moving notably in either direction", and overall credit growth was "quite subdued at this stage".

The Australian dollar fell after the decision, trading at US95.76c at yesterday's close.