RBA hangs fire on rate rise

By GREG ANSLEY

CANBERRA - Australia's Reserve Bank yesterday underlined its more tolerant approach to growth and inflation when it declined to follow the New Zealand lead and kept its official cash rates unchanged for at least another month.

Although the Australian economy is stronger than New Zealand's, and its inflation rate is marginally above its comfort zone while New Zealand's remains within its target range, interest rates have stayed at their 30-year low of 4.25 per cent.

New Zealand's Reserve Bank surprised most analysts a fortnight ago when Governor Don Brash pushed the cash rate up from 4.75 per cent to 5 per cent after warning that a more buoyant than expected economy could push inflation beyond the bank's 3 per cent ceiling.

So far Sweden is the only other country to raise rates, although as the United States recovers there are expectations that the Federal Reserve may lift US rates next month.

Unlike New Zealand, which viewed with concern a surprisingly rapid recovery in consumer and business confidence, booming retail and housing sectors, and strong employment growth, analysts said yesterday that Australian Reserve Bank Governor Ian Macfarlane considered he still had room to move.

More will be known of Macfarlane's view of the world tonight when he gives a speech in Melbourne on the past, present and future of the Australian economy.

He has previously spoken with some caution of global uncertainty and its potential impact on Australia, with renewed concern over the price of oil, which has risen 27 per cent in the past month and which could stall growth in key sectors.

Among the hardest hit could be manufacturing. It is powering ahead with surveys noting growth hitting a seven-year peak in March, renewed confidence, new orders doubling and exports exceeding expectations.

Fuelled by enthusiastic consumer spending and a boom in housing, the strength of growth has produced a widespread belief that the Reserve Bank will attempt to cool the economy with a series of rate rises, beginning next month or in June with a 25-point increase.

This would reverse cuts last year that pushed down the cash rate from 6.25 per cent, but would run into strong political opposition and hard lobbying from business and industry - especially the housing sector.

The bank came under heavy fire two years ago when it began raising rates as housing slowed.

Yesterday the Bureau of Statistics issued figures showing that building approvals fell for a fifth consecutive month with a 3.7 per cent decline in February, a trend that is likely to be strengthened when the Government's first home-buyers' grant is reduced from A$10,000 ($12,000) to A$7000 on July 1.

"The importance of a healthy new housing industry to jobs and economic growth has clearly been demonstrated over the past year, and putting the brakes on the economy with an early rate rise would set alarm bells ringing for many builders," said Ruth Morschel, Housing Industry Association director of public affairs.

But other figures issued yesterday showed consumer demand had created a surge in imports that widened the trade deficit in February.

The A$604 million deficit was considerably higher than market expectations, driven by a 7 per cent rise in imports of consumption goods.

* The New Zealand dollar was pushed down after the lack of movement in Australian interest rates sparked a sell-off in the Australian dollar.

Tim Robinson of Deutsche Bank said the kiwi was caught in the aussie's backwash after the Reserve Bank of Australia left interest rates unchanged, leaving many in the market wondering about the Australian economy.

The Australian dollar shed 60 points during the day while the kiwi had a more modest slide, from a high of US44.17c to a low of US43.85c.

Market expectation was fairly evenly divided about what the RBA would do, although New Zealand's rate rise decision was seen as one driver across the Tasman.

"I think they've done the sensible thing in waiting [to raise rates], but the market on the other hand has taken it as a sign that they're uncertain about the economy, about potential issues affecting growth going forward, and has sold Aussie dollars," Robinson said.

- NZPA