Australian cash rate expected to keep rising

Photo / Bloomberg

Sixty-four per cent chance Reserve Bank will raise target lending rate tomorrow Australia's central bank is likely to lift interest rates by 1.25 basis points by the end of the next year as a mining boom continues to stoke the economy, according to HSBC.

"Interest rates need to rise in this country because the outlook for the economy is very strong and we're starting this next upswing with inflation at a relatively elevated level," Paul Bloxham, named HSBC Australia chief economist last month, told the ABC's Inside Business programme.

There is a 64 per cent chance Reserve Bank Governor Glenn Stevens will raise the 4.5 per cent target lending rate tomorrow, according to an index compiled by Credit Suisse Group AG.

The outlook for the resources industry appeared "very strong", said Bloxham, who spent 12 years at the Reserve Bank of Australia and predicts rates will climb by 1.25 percentage points by the end of next year.

Manufacturing in China, Australia's largest trading partner and New Zealand's second-biggest export market, expanded at the fastest pace in four months in September.

"At a time when global conditions are shaky, and the US and Europe are grappling with near double-digit unemployment, our economy is going from strength to strength," Australian Treasurer Wayne Swan said in an emailed note yesterday. The Government was "on track to get the budget back to surplus in 2012-13, well ahead of any major advanced economy".

The Reserve Bank "all but announced the rate rise" on October 1 after it posted its index of commodity prices that showed gains in iron ore, power-station and steelmaking coal, Terry McCrann, economic columnist for the Australian newspaper, wrote in a column published on Saturday.

McCrann, who a year ago correctly predicted the RBA's decision to raise the key rate, said the index was higher than the peak it reached in 2008, when the cash rate was at 7.25 per cent.

The Australian dollar rallied for a seventh week in the longest winning streak since May 2009 as traders increased bets that the Reserve Bank would boost borrowing costs when it meets tomorrow. The currency appreciated 0.6 per cent to US97.25c in New York on Friday, and touched US97.51c, the highest since July 2008.

China's Government said last week its purchasing managers' index rose to 53.8 in September from 51.7 in the previous month. Readings above 50 show growth.

Deputy Prime Minister Swan is acting as leader while Julia Gillard is on her first overseas trip and will chair a Cabinet meeting tomorrow as the Reserve Bank releases its monetary policy decision.

Asian currencies completed a fifth weekly advance, the longest winning streak since March, as global funds pumped more money into Asian assets to profit from the world's fastest economic growth.

The Bloomberg-JPMorgan Asia Dollar Index climbed to the highest level in more than two years after the Asian Development Bank raised its 2010 growth forecast for Asia excluding Japan to 8.2 per cent, from an April estimate of 7.5 per cent.

Data late last week showed manufacturing in China, the biggest buyer of exports from South Korea, Taiwan and Thailand, expanded in September at the fastest pace in four months.

South Korea's won led gains with a 2.2 per cent weekly jump to 1130.45 per dollar in Seoul, according to data compiled by Bloomberg. The New Zealand dollar ended the week at US$73.8c.

- Bloomberg