Australia Surprises With Rate Hike; Currency Jumps
AUSTRALIA, CENTRAL BANK, INTEREST RATES, ECONOMY
Reuters
| 02 Nov 2010 | 01:26 AM ET
Australia's central bank surprised markets by raising its key cash rate to a two-year high of 4.75 percent on Tuesday, saying a modest tightening was needed as a pre-emptive strike against inflation.
The local dollar shot a cent higher after the Reserve Bank of Australia (RBA) lifted rates by 25 basis points at its monthly policy meeting. The central bank had already led the developed
world in hiking 150 basis points between October and May.
"The board concluded that the balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent," RBA Governor Glenn Stevens said in a statement.
Many investors had thought the central bank would skip a hike for a sixth straight month, given data out last week had shown core inflation had moderated to 2.5 percent, in the middle of the RBA's long-term target band of 2 to 3 percent.
The move also stood in sharp contrast to loose policy in major developed nations and comes just a day before the Federal Reserve is expected to announce a fresh phase of quantitative
easing in the face of unbearably high unemployment.
Yet Stevens said surging export earnings and a lack of spare capacity in the economy meant inflation risks ahead were to the upside, no matter the recent benign outcome.
Analysts took this to mean further moves ahead, though likely not until February. Interbank futures fell sharply across the curve but showed only a one-in-10 chance of a move next
month. The RBA board does not meet in January.
"The Reserve Bank's capacity to surprise continues," said Michael Blythe, chief economist at Commonwealth Bank. "At this stage we've got the next hike pencilled in for February and we've got the cash rate at 5.75 percent by the end of 2011."
Banks Overtake Official Hike
The pace of official tightening could be slowed by leading home lender Commonwealth Bank of Australia's decision to raise its own mortgage rate by 45 basis points. Other major lenders are
considered likely to follow, citing higher funding costs.
Mortgage rates have a big impact on spending power in a nation obsessed with home ownership and where over 90 percent of home loans are on floating rates.
"We'll still get another four hikes next year, that hasn't changed," said Stephen Walters, chief economist at JPMorgan.
"The reason we're not looking at more is that the commercial banks will probably do some of the heavy lifting, but there's still a long way to go in the tightening cycle."
The RBA has repeatedly warned that rates would have to rise given the boom in resource exports to China and India.
There was promising news from both those countries on Monday as key measures of manufacturing surged ahead, easing RBA worries about global growth.
Indeed, Asian demand for iron ore and energy is fuelling massive long-term investment in mining and liquefied natural gas which should drive growth for years to come.
"The numbers involved are staggeringly large," said Paul Bloxham, an economist at HSBC. He noted the value of work-yet-to-be done on engineering projects already begun is equal to 18 percent of the country's A$1.3 trillion GDP.
The impact was clear in mining profits, which climbed a record 63 percent in the second quarter alone, and in hiring with a 360,000 increase in jobs in the year to September. The jobless rate is already down at 5.1 percent, compared to 9.6 percent in the United States and 10.1 percent in the euro zone.
"Given these conditions, the moderation in inflation that has been under way for the past two years is probably now close to ending," Stevens concluded in Tuesday's statement.
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