More interest rises tipped to clip growth in Australia

By GREG ANSLEY in Canberra

Australia is bracing for further interest rate rises following yesterday's increase of 25 basis points in official cash rates and veiled warnings of additional moves to cool a powerhouse economy.

The Reserve Bank decision to lift rates from their 30-year low to 4.5 per cent was expected and built into most forecasts, but there are concerns the bank may again stall growth by heavy-handed rate movements.

"We are only now emerging from the last episode of rate rises initiated by the Reserve Bank," Australian Chamber of Commerce and Industry acting chief executive Lyndon Rowe said.

"[Their] depressive effects on employment and investment are there to be seen by anyone who cares to look."

There are also fears that the gap between interest rate levels in Australia and the United States may be widening too far, after the US Federal Reserve's decision to leave cash rates at the 1.75 per cent set after the September 11 terror attacks.

The Australian Reserve's view of the outlook for the economy and interest rates will be expanded tomorrow in its latest quarterly review, but most commentators are expecting a series of rises to lift rates by at least another 1 percentage point by early next year.

The decision to move by 25 basis points followed what Governor Ian Macfarlane said was a marked change in the economic climate over the past few months.

The US downturn had been milder and shorter than expected, with an upturn among Australia's main Asian trading partners - Japan excepted - and signs of recovery in Europe.

Macfarlane said the Australian economy was outperforming other economies by a wide margin, recording 4 per cent growth last year.

Strong growth was expected to continue.

The bank considered the economic outlook no longer warranted the existing very low cash rates, which in time could jeopardise continued economic expansion.