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Australia ups interest rate on strong signs of recovery

Australia’s central bank raised its cash rate by 25 basis points to 4.0 per cent on Tuesday and flagged further hikes ahead, saying a surprisingly strong recovery allowed it to move policy toward more normal settings.

business Updated: Mar 02, 2010 23:04 IST
Wayne Cole

Australia’s central bank raised its cash rate by 25 basis points to 4.0 per cent on Tuesday and flagged further hikes ahead, saying a surprisingly strong recovery allowed it to move policy toward more normal settings.

Interest rate futures slid as investors priced in further gradual hikes from the Reserve Bank of Australia (RBA).

A rise in April was seen as unlikely but the odds of an increase in May were evenly split and almost fully priced in for June.

“It is very likely the RBA will hike again in the next three months,” said Rory Robertson, interest rate strategist at Macquarie. “It’s a ‘normalisation’ of policy given the economy has performed better than anyone dreamed a year ago”.

The increase put Australia far ahead of most other rich nations where rates are at 1 per cent or less. RBA governor Glenn Stevens stated that lending rates were still below average and Tuesday’s move was a step toward getting back there.

“With growth likely to be close to trend, and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average,” Stevens said in a statement.

Last month, he estimated a more normal range for lending rates would be between 4.25 and 4.75 per cent, and investors assume the bank will get to the top of that band by year-end.

Interbank futures are fully priced for a move to 4.25 per cent by July, and then in stages to 4.75 per cent by December. One-year swap rates edged up to 4.65 per cent.

Reaction in the currency market was restrained as the Australian dollar had already risen sharply in recent days, hitting a record high on the euro and a 25-year peak on sterling.

Treasurer Wayne Swan spun the hike as a sign of Australia's relative strength. Rising mortgage rates are always unpopular in a country obsessed with home ownership.

His optimism should be supported by figures due on Wednesday which are expected to show the economy grew by a solid 0.9 per cent in the fourth quarter of 2009, a marked step up from 0.2 per cent the previous quarter.