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SYDNEY - Australia's central bank raised interest rates a quarter point as expected to 6.25 per cent today and called the risks to inflation significant, leaving the door open for a further tightening.
The Reserve Bank of Australia (RBA) said its third rate rise since May was aimed at restraining price pressures, given underlying inflation was threatening to exceed a 2-to-3 per cent target range in the near term.
High producer prices, above-average wage growth, brisk demand for credit and a still-strong global economy all posed risks, the RBA said. "It's obviously very much consistent with expectations," said Stephen Halmarick, co-head of market economics at Citigroup. "But it's open ended I think, leaving themselves the option of going again if required."
"A quick read of the statement certainly does imply that the risks are all to the upside," he said.
The move had long been anticipated by markets. The Australian dollar held steady around 77.30 US cents, while bond futures firmed on relief the central bank did not tighten even more.
After 15 years of expansion, the Australian economy is running troublingly short of spare capacity, particularly in the labour market where unemployment is at 30-year lows.
"They're still concerned about capacity being tight and inflation risks, although they do acknowledge there are some initial signs that lending is responding to the hikes they've already done," said Kieran Davies, chief economist at ABN AMRO.
Figures out on Wednesday showed mortgage demand waned in September following a rate rise by the central bank in August. The number of home loans committed to fell 1.2 per cent, while the value of all loans dropped 3.3 per cent.
The RBA's new governor, Glenn Stevens, has made it clear his main task was to restrain inflation and thus interest rates were more likely to rise than not. Stevens took over the top job from 10-year veteran Ian Macfarlane in September.
The government, too, acknowledged the need for higher rates, even though this can cost political points ahead of an election next year.
"I know that it can cause pain to some people, and I fully understand that," Prime Minister John Howard said in reaction.
But, he explained, the rise was needed because parts of the economy, notably mining, were doing so well.
Politicians are well aware this latest rise in mortgage costs will hurt the pockets of Australia's heavily indebted household sector.
When the central bank began its tightening campaign in mid-2002, the ratio of debt to disposable income was around 110 per cent. By June this year it was at 157 per cent.
Neither will higher rates go down well with the farming sector, currently suffering the worst drought on record.
No doubt the government is hoping that most economists are right to think 6.25 per cent will be the peak for rates in this cycle, just as it was in the 1999-2000 phase of rate hikes.
Financial markets, however, are pricing in a near 50/50 chance of a move to 6.5 per cent next year.
"Where the cash rate is now is probably enough to head off inflation risks," said Michael Blythe, chief economist at Commonwealth Bank.
"Another rise will depend on how the economic data prints over the next couple of months. If the economy is not responding, there will quite likely be another rise next year," he added.
The central bank itself will offer a more detailed outlook for inflation and rates in its quarterly monetary policy statement on Monday.
- REUTERS
