SYDNEY: Australia's central bank raised its benchmark interest rate a quarter point Wednesday to its highest level in almost 11 years, and analysts said more increases were on the way.
The governor of the Reserve Bank of Australia, Glenn Stevens, raised the overnight cash rate target to 6.5 percent, the first adjustment since November, to curb an inflation rate running faster than he had forecast and to cool the biggest surge in lending since 1989.
Financial markets are already pricing in another move to 6.75 percent within the next six months.
Central banks globally are battling to curb inflation as booming world economic growth forces food and commodity prices up. England, Canada, New Zealand and South Korea all raised interest rates in the past month. The European Central Bank president, Jean-Claude Trichet, said last week that he might raise the benchmark rate from 4 percent next month.
"We see a still above-trend global growth, high commodity prices, easier fiscal policy, an ongoing investment boom and a rural recovery delivering 4 percent economic growth," said Scott Haslem, chief economist at UBS.
"At this point, we think the risks remain to the higher side and this underpins our expectation that a further hike at some point beyond August is a better than even bet," he added.
Investors seemed to agree, with interest rate futures pricing in around 28 basis points of tightening over the next 12 months, according to Credit Suisse.
Some were cautious, in case the squeeze in global credit markets took a toll on economic activity.
"I'm a little torn, seeing the domestic factors auguring strongly in favor of further rate increases, and the mess in the U.S. credit market suggesting the global economy may be in for a good bucketing," said Matthew Johnson, senior economist at ICAP.
The International Monetary Fund has played down the threat of a U.S. credit crunch crippling the world economy.
The fund raised its global growth forecast to 5.2 percent for 2007 and 2008, from its previous prediction of 4.9 percent for both years.
The rate move Wednesday will cost borrowers an extra 40 Australian dollars, or $34, per month on the average mortgage of 235,000 dollars, according to the Canberra-based Housing Industry Association.
The increase leaves consumers facing the highest borrowing costs since Prime Minister John Howard came to power in 1996.
Howard is behind in opinion polls, with an election due this year; the consumer price index is due on Oct. 24, but it is quite possible that the formal election campaign will be under way then, and the reserve bank has said it would be reluctant to move during the actual campaign.
Glenn Maguire, chief Asia economist for Société Générale, thinks the index could jump by 1.1 percent in the third quarter and add to pressure for a tightening.
"The RBA is now faced with a very real dilemma of the inflation fundamentals demanding a further rate hike in the midst of a federal election campaign where that decision will be highly politicized," said Maguire.
Source : http://www.iht.com/articles/2007/08/08/business/rates.php
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