Australia hikes interest rates

Reserve Bank of Australia governor Glenn Stevens

SYDNEY - Australia's central bank raised its benchmark interest rate to 4.25 per cent and signalled further increases, dismissing warnings that higher borrowing costs are already eroding consumer spending.

Governor Glenn Stevens boosted the overnight cash rate target from 4 per cent, the Reserve Bank of Australia said in Sydney yesterday. The fifth increase in borrowing costs in six meetings was predicted by 13 of 23 economists in a Bloomberg News survey.

The Australian currency and bond yields rose after Stevens said the move was a "further step" in returning interest rates to average levels. Yesterday's decision indicates central bank concerns that inflation and house prices will surge without greater monetary restraint, even after retail sales and home construction dropped in February.

"We've got a way to go before we see rates at normal levels," said Adam Carr, a senior economist at ICAP Australia.

"There's a good case we'll see much stronger than normal growth rates with much higher than normal inflation and I think the RBA is aware of that."

Stevens said last week that Australian house prices were "getting too high", signalling he wants to minimise the danger of a housing boom and bust in the aftermath of the US example.

"Interest rates to most borrowers nonetheless have been somewhat lower than average," the Governor said in yesterday's statement.

"With growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average."

Policymakers from India to China have joined Stevens in withdrawing monetary stimulus this year, seeking to head off asset-price bubbles as the region leads global growth.

China has twice ordered banks to increase the share of their assets held in reserve and India increased interest rates last month for the first time in almost two years.

Australia has led the world in raising borrowing costs partly in anticipation of a surge in investment on new mines and resources that may spark price pressures.

Projects such as the Chevron-led Gorgon natural gas project in Western Australia are planned to meet soaring demand from China, the world's fastest growing major economy.

Inflation in Australia reached 2.1 per cent in the quarter to December, up from 1.3 per cent the previous three months, while still inside the central bank's target range of between 2 per cent and 3 per cent.

A gauge of Australia's inflation rose in March at five times the pace of the previous month, a report showed last week.

Consumer prices advanced 0.5 per cent from February, when they climbed 0.1 per cent, according to an index compiled by TD Securities and the Melbourne Institute.

Yesterday's decision comes as Prime Minister Kevin Rudd's government is due to hold an election within the next 12 months.

More than two-thirds of the population own homes, compared with less than 50 per cent in some European nations. The previous four increases added about A$200 a month to repayments on an average A$300,000 mortgage.

Stevens was the first G-20 policymaker to raise borrowing costs twice this year. By contrast, the US Federal Reserve Chairman Ben Bernanke said last month that the world's biggest economy "continues to require the support of accommodative monetary policies".

The Fed has kept its benchmark rate close to zero since late 2008 and the European Central Bank's rate is at a record low of 1 per cent.

Stevens brushed aside weaker recent figures suggesting a softening of economic growth in the first quarter as government fiscal-stimulus measures wane.

Australian home-building approvals fell for a second month in February after the Government reduced grants to first-time buyers.

Demand for new homes surged in the second half of 2009 after Rudd tripled grants to first-time buyers of new homes to A$21,000. The grants were cut to A$7000 on January 1.

- BLOOMBERG