Australia central bank lifts rates to 11-year high
SYDNEY, Nov 7: Australia’s central bank raised interest rates to an 11-year high on Wednesday saying the economy had to slow to contain inflation, leaving the door open for further hikes.
The rate rise is the first ever during a national election campaign in Australia, where rising mortgage rates are a sensitive topic, dealing a blow to a coalition government trailing the opposition in opinion polls ahead of a Nov. 24 vote.
In a widely anticipated move, the Reserve Bank of Australia (RBA) lifted its key cash rate a quarter of a percentage point to 6.75 per cent, the second rise in four months and the 10th in a tightening cycle that began in mid-2002.
The Australian dollar climbed toward 23-year peaks above 93 cents as investors were already pondering the prospect of a further hike, perhaps as early as December.
“We continue to see another move to 7 per cent,” said Stephen Halmarick, co-head of market economics at Citi.
“Our base case for another rise is February after the consumer price index but I wouldn’t rule out one as early as December,” he said.
Investors seemed to agree, with the futures market showing around a 37 per cent chance of a move in December but fully priced for 7 per cent by March. In all, no less than 46 basis points of further tightening is foreseen in the next 12 months.
Explaining the move, RBA Governor Glenn Stevens warned that inflation would likely be above the top of the central bank’s 2 per cent-to-3 per cent comfort zone by the first quarter of 2008.
The central bank’s key measure of core inflation had already accelerated to 3 per cent in the third quarter, and analysts suspected a further pick up was likely this quarter.
The central bank noted domestic demand had strengthened since its previous hike in August and there were few signs of moderation as yet. The high Australian dollar would help restrain price pressures somewhat, it added.
“But growth in aggregate demand will, nonetheless, need to moderate if inflation is to be kept to 2-3 per cent in the medium term,” Stevens said.
