Australia first G-20 nation to raise interest rates

SYDNEY: Australia, the first Group of 20 (G-20) nation to raise interest rates since the height of the global financial crisis, has signalled further increases in coming months.

Reserve Bank Governor Glenn Stevens unexpectedly boosted the overnight cash rate target on Oct 6 by a quarter percentage point to 3.25%, saying the justification for a benchmark rate at a half-century low “has now passed”.

The local currency jumped after Stevens said Australia’s economy, which expanded during the deepest global recession since the 1930s and avoided the worst of the credit crisis, will strengthen faster than its major peers. Rising job vacancies, retail sales, house and stock prices, plus surging business and consumer confidence may prompt more rate increases.

“The emergency lows in rates are no longer needed,” said Alan Oster, chief economist at National Australia Bank Ltd in Melbourne. Stevens will raise the cash rate to 3.75% by the end of this year and 4.25% next year, he added.

The Australian dollar held near its highest in 14 months on Oct 7, trading at 88.98 US cents as of 10.03am in Sydney from 89.02 US cents in New York on Oct 6. The nations’ benchmark S&P/ASX 200 index rose 0.7%.

The currency has gained 27% this year amid speculation Stevens will raise borrowing costs again, even as policy makers in the US, Europe and Japan keep benchmark rates unchanged.

The European Central Bank will leave its benchmark rate at a record low of 1% on Oct 8, according to analysts surveyed by Bloomberg. The US Federal Reserve kept the rate for overnight loans between banks at a record low of between 0% and 0.25% on Sept 24.

“The fact the Reserve Bank chose to pull the pin shows they’ve got a lot of confidence in the economy,” said Joshua Williamson, a senior economist at Citigroup in Sydney. “The view about this from abroad will be a little bit bemused -- here’s this little antipodean economy that’s doing well.

“And now this little central bank has beaten the Norges Bank, Sweden’s Riksbank, the Bank of Korea and the People’s Bank of China in raising rates.”
The Bank of Israel in August became the first central bank to increase rates since signs of easing in the global recession began. Israel is not a member of the G-20.

“The risk of serious economic contraction” in Australia has passed, Stevens said in a statement on Oct 6.

“The board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy,” he added. “This will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.”

The increase means households with an average-sized mortgage of A$250,000 (RM762,600) will pay an extra A$40 a month in repayments.
“The Reserve Bank has flagged there may be more to come,” Treasurer Wayne Swan told reporters in Canberra on Oct 6. There is “no doubt” Australia’s economy is recovering, he said.

Reports last week showed retail sales, approvals to build private homes, bank mortgage lending and property prices all jumped in August. Advertisements for job vacancies rose in September for a second straight month, gaining 4.4%.

Australia’s building industry expanded in September for the first time in 18 months, according to an index published by the Australian Industry Group.
A report on Oct 8 will show the unemployment rate rose to 6% last month from 5.8%, according to the median estimate of 20 economists surveyed by Bloomberg. By contrast, Europe’s jobless rate climbed in August to a 10-year high of 9.6%, and reached 9.7% in the US, the highest level since 1983.

Consumer confidence jumped last month to the highest level in more than two years, a Westpac Banking Corp report showed on Sept 9. Business sentiment climbed in August to the highest level in almost six years, according to a separate report.

“Overall, growth through 2010 looks likely to be close to trend,” Governor Stevens said. “Unemployment has not risen as far as had been expected.”
Analysts including Citigroup’s Williamson estimate trend gross domestic product growth is currently between 2.75% and 3%.

The bank’s decision will be “a shock for consumers in particular and those first-home buyers who have been borrowing pretty big”, said Stephen Walters, chief economist at JPMorgan Chase & Co in Sydney, the only one of 20 economists surveyed by Bloomberg News who forecast the Oct 6 move.

“I think the Reserve Bank will move quite slowly” on future moves with quarter-point increases “every couple of months or so”, he said.
Consumer spending, stoked by A$20 billion in government cash handouts to households, helped fuel a 1% expansion in Australia’s GDP in 1H2009.
The government is also boosting domestic demand by spending an extra A$22 billion on roads, railways, ports and schools.

There are increasing signs the stimulus is starting to drive up asset prices. The S&P/ASX 200 index of stocks has surged almost 25% this year, and a report published on Sept 30 by property monitoring company RP Data-Rismark showed house prices climbed 7.9% in the first eight months of this year.

“Housing credit growth has been solid and dwelling prices have risen appreciably over the past six months,” Stevens said on Oct 7.
The Reserve Bank scrapped its forecast in August for the economy to contract this year, instead predicting GDP will rise 0.5%. The bank expects growth will accelerate to 2.25% in 2010 and 3.75% in 2011.

“There’s a risk they’ve gone too early,” said Prasad Patkar, who helps manage about US$1.2 billion (RM4.12 billion) at Platypus Asset Management in Sydney. “The recovery may not be all that well entrenched and yet they’re starting to unwind the stimulus.” – Bloomberg LP