Rate rise 'cold comfort' for families

Treasurer Wayne Swan says the latest interest rate rise is cold comfort for families and business but is the reality of a strengthening economy.

The central bank on Tuesday increased the rate by 25 basis points to 4.25 per cent - the fifth increase in seven months - following its monthly board meeting, as expected by a majority of economists.

Mr Swan said the 25 basis point rise was taking interest rates to more normal levels.

'Strengthening the economy'

"I know that is cold comfort for a lot of families and a lot of people in businesses," he told reporters.

"But that is the reality of a strengthening economy."

Mr Swan said rates were still lower than they were before the global recession.

Someone with a $300,000 mortgage was still paying $500 less per month or $6,000 less per year, he said.

Mr Swan pointed out the 4.25 per cent cash rate - following the RBA's latest rate move - was identical to early 2002, before rates were increased 10 consecutive times during the Howard government era.

'Historically low levels'

"Rates are now at the level that they were when the Liberal Party imposed on Australia 10 rate rises in a row so rates are still at historically low levels," he said.

Mr Swan said he was aware the rise would hurt some but it was a consequence of a growing, strengthening economy.

"The government understands how tough it can be for someone who is a first homeowner.

"The fact is that rates went to 50 year lows during the global recession and as the reserve bank governor is pointing out today ...they are merely returning to more normal levels," Mr Swan said.

Warning to banks

Mr Swan warned the banks not to jack up their interest rates beyond the amount decided upon by the Reserve Bank.

"There would be no justification whatsoever for any bank to move up and above this cash rate increase decided by the independent Reserve Bank," he said.

"If any bank did that, that would be arrogant in the extreme and it would not be justified."

Mr Swan pointed to recent research by the RBA which found the interest margin enjoyed by the banks was 20 to 25 basis points above what it had been before the global financial crisis.

He sympathised with homeowners grappling with rising rates.

Tight budget ahead

"It is a painful and uncomfortable fact that with a strengthening economy unfortunately we do see rates moving to more normal levels."

Mr Swan hinted the budget, due to be delivered on May 11, would be tight.

"We have a strict set of fiscal rules in our medium-term fiscal strategy and you'll see that applied in the budget," he said.