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Interest Rate Rises Inevitable

Posted by Tamara McDowell on March 26, 2010

Australian interest rates will continue to rise to more normal levels despite global jitters as holding off with increases risks falling behind on inflation, according to a top central banker.

Meanwhile Businessspectator reported RBA assistant governor Philip Lowe as also issuing the clearest warning yet against a speculative bubble in home prices, while welcoming a higher local dollar as part of boom in the country’s terms of trade. 

The Australian dollar duly rallied after his speech while bill futures slid as investors revised up the chance of a rise in the cash rate as early as next month. 

“The RBA remains very upbeat and that means a rate hike in April is more likely than not,” said Rory Robertson, interest rates strategist at Macquarie. 

The central bank has already lifted rates by a full percentage point in six months and the market was now implying a 57% probability of a move to 4.25% at the next policy meeting on April 6. 

That was a marked swing from a 25% probability early this month – and it came despite escalating concerns about sovereign debt in the euro zone which had tempered the global appetite for risk. 

Some analysts had thought the angst over debt abroad might deter the RBA from moving at home, but Dr Lowe seemed to think otherwise. 

“The alternative of waiting to see how the myriad of risks evolves before adjusting policy runs the significant downside of moving too late, particularly given that the economy is starting this upswing with less spare capacity than in previous upswings,” Dr Lowe said in a speech to an industry conference. 

Meanwhile, the RBA’s semi-annual review of the financial system found that households and firms were coping well with higher rates. 

In particular, household net worth had climbed around 11% in 2009 to stand at $610,000 per household.
The RBA was less happy that the boom in economic activity was already driving home prices higher, with some measures recently rising by 1% a month. 

“It would obviously be unhelpful if a speculative cycle were to emerge on the back of the recent strength in housing prices,” Dr Lowe said. 

He said it was an area lenders and current and prospective home owners “will need to watch carefully”. 

David de Garis, a senior economist at NAB, thought this to be a “blunt warning” on home prices. 

“In other words, more rate rises would be in the offing,” de Garis said.

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