Australia hikes rates

Australia’s central bank raised its key cash rate by 25 basis points to 4.5 percent recently and signalled the first stage of its tightening cycle was over after six hikes in eight months


Still, investors and analysts thought it was only a matter of time before the Reserve Bank of Australia (RBA) would have to take rates further given the strength of the economy.

“The RBA has announced that “Phase One” of its tightening is over,” said Macquarie interest rate strategist Rory Robertson.

In a statement after its monthly meeting, RBA Governor Glenn Stevens noted lending rates were now around average and the rise from three percent since October was a significant adjustment.

“Eventually the RBA will shift to ‘Phase Two’, where policy moves into restrictive territory,” said Robertson.

“That might be a few months but since Australia’s heading into its greatest-ever mining boom, it may be sooner rather than later.”

After an initial dip, the prospect of more hikes later in the year helped underpin the Australian dollar around $0.9240, while interbank futures moved to price in the next hike by September, if not August.

“We think they will resume raising rates around August when the next CPI is released,” said Spiros Papadopoulos, an economist at National Australia Bank. The consumer price report for the second quarter is due out on July 28.

“We see rates at 5.25 percent by the end of the year, and 6.0 percent by the end of next year,” he added.

One-year swap rates were up around 5.10 percent, the highest since October 2008 when the RBA had just begun the dramatic easing campaign which took the cash rate from 7.25 percent to its historic low of 3.0 percent.

Further hikes would be a headache for the Labor Government, which is expected to go to the polls late this year.

Mortgage rates are a sensitive topic in a country obsessed with home ownership and any increase whips up hysterical media tales of voters on “struggle street”.

An opinion poll showed Labor slipping behind the opposition Liberal coalition for the first time, adding an edge of political uncertainty for investors to cope with.

Managing success
Still, the fact the RBA has led the world in tightening merely testifies to how successful the country has been in dodging the global financial crisis.

Aggressive fiscal and monetary stimulus, a stable banking system and strong demand for Australia’s commodity exports from Asia, especially China, all helped insulate it.

Indeed, demand has been so fierce that prices for iron ore and coal, Australia’s two biggest export earners, have surged this year with iron ore almost doubling.

The RBA’s own measure of Australian commodity prices jumped almost 18 percent in April alone and is rapidly approaching the record highs hit in 2008.

All of which will deliver a rich windfall to profits, wages, and tax receipts in coming months, while funding a boom in mining and energy investment.

This was coming while the economy was already stretched for spare capacity, with unemployment down at 5.3 percent, inflation near the top of the RBA’s two to three percent target band and house prices surging 20 percent in the past year.

The RBA’s Stevens has conceded that inflation was now more likely to be in the upper half of its target band this year, rather than the middle.

Which is why most analysts assume rates will eventually have to move into restrictive ground. A poll taken at the beginning of May found most expected rates to be at 5.5 percent within 12 months.

“The fundamental issue derives from the renewed commodity boom that is set to inject a sizeable amount of income into an economy already running close to full capacity,” said Michael Blythe, chief economist at Commonwealth Bank.

“We are happy to hold with our call of a five percent cash rate by late 2010 and a move towards six percent in 2011.”