Australian interest rates are rising back towards average from very low levels and are now close to what policymakers consider normal, a top central banker said on Monday. Guy Debelle, assistant governor of the Reserve Bank of Australia (RBA), also told a Senate inquiry into finance for small business that the central bank was not trying to depress consumer demand by raising interest rates. Rather, it aimed to ensure growth could be sustained.
"We decided that the situation where we needed historically low interest rates are no longer necessary and we are moving back to something around about average levels, which is not far away from where we are at the moment," Debelle said. Just last week, the RBA raised its key cash rate by 25 basis points to a 14-month high of 4.25 percent and flagged more hikes in coming months as the economy recovered from the global economic downturn at a much faster pace than expected.
The central bank has raised rates five times in six policy meetings from a low of 3 percent in September. Investors are pricing in a 28 percent chance of a rate hike in May, while the cash rate is expected to be raised by 95 basis points in the next 12 months. That would take the cash rate to above 5 percent.
Markets showed limited reaction to Debelle's comments since they largely reflected investor thinking. Most focus was on reaction to weekend news that euro zone finance ministers had backed a rescue package for Greece. "These remarks seem pretty much in line with recent RBA views; a little below average would imply that they are not far from an initial pausing point but not there yet," said David de Garis, senior economist at National Australia Bank.
The central bank has indicated that average rates could be somewhere in the range of 4.25 percent to 4.75 percent. Some analysts reckon an astonishingly solid labour market and prospects for a huge windfall from higher iron ore and coal prices - two of Australia's largest exports - could mean rates will have to rise above average over time.
Debelle said the Australian economy was growing around trend, having improved much more quickly than the central bank had expected. Historically, trend growth has been around 3.25 to 3.5 percent. In February, the central bank forecast economic growth in 2010 of 3.25 percent and in 2011 of 3.5 percent, but analysts suspect those estimates have been revised even higher since. Debelle told the Senate inquiry that he expected demand and supply for loans to rise as the economy gathered steam.
Still, government data on Monday showed the number of home loans fell by 1.8 percent in March after a sharp 7.3 percent slide in February, undermined by higher interest rates and the withdrawal of fiscal stimulus following the global downturn. The data marked the fifth straight monthly fall in home loans. The proportion of loans taken up by first-home buyers dropped to 18.1 percent in March, its lowest since mid-2008, from 20.5 percent in February.
Investor demand for loans also fell, while lending for construction fell a steep 3 percent. All of which, analysts say, will stunt the supply of new homes and so add to upward pressure on housing prices. Home prices have been rising steadily for months and one closely watched measure hit record highs in February. House price inflation has been worrying the central bank, which fears keeping rates too low for long could fuel a speculative bubble.
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