Rates rise as Aussie upswing continues

SYDNEY - Australia's central bank raised its benchmark interest rate by a quarter percentage point for an unprecedented third straight month yesterday, as evidence mounts that the nation's economy is strengthening.

Reserve Bank Governor Glenn Stevens increased the overnight cash rate target to 3.75 per cent from 3.5 per cent, widening the gap with New Zealand, where rate rises remain on hold.

In New Zealand, the official cash rate has been at 2.5 per cent since April and Reserve Bank Governor Alan Bollard has indicated it will not rise until the second half of next year.

While Bollard remains cautious about the prospects of the New Zealand recovery, the Australian economy has entered a "new upswing" expected to last several years, boosted by rising consumer confidence and China's demand for resources, such as iron ore from BHP Billiton.

House prices have climbed 10 per cent this year, employment rose in October, and investment is forecast to surge in projects such as Chevron Corp's Gorgon liquefied natural gas field, recent reports show.

"I don't think it'll be lost on the board that 3.75 per cent is still exceptionally stimulatory," Adam Carr, a senior economist at ICAP Australia in Sydney.

"It's a rate that will continue to provide significant ongoing support to an economy that will probably be firing on all cylinders in 2010."

Stevens said the bank's three rate increases will "work to increase the sustainability of growth in economic activity and keep inflation consistent" with his target range of 2 per cent to 3 per cent "over the years ahead".

"Growth in 2010 is likely to be close to trend and inflation close to target," Stevens said.

The increase is the first time the central bank has raised borrowing costs at three straight meetings, boosting the rate from a half-century low of 3 per cent.

Australia is also running ahead of the US and Europe, which set their benchmark lending rates at historic lows this year.

Speculation that Stevens would continue to lead the world in raising rates has stoked this year's 32 per cent surge in the nation's currency, making it the best performer among the 16 major currencies against the US dollar.

A report published yesterday showed China's manufacturing growth held at the fastest pace in 18 months in November, aiding the rebound of the world's third-biggest economy and Australia's largest iron ore customer.

Australia's economy expanded 1 per cent in the first half of the year and is forecast by the Reserve Bank to grow 3.25 per cent next year and in 2011. Third-quarter gross domestic product figures will be published on December 16.

Still, this year's interest-rate increases add about A$150 to monthly repayments on an average A$300,000 home loan, and may prompt consumers to trim spending that surged in the first half of the year after Prime Minister Kevin Rudd's government distributed more than A$20 billion to households.

"There's a real risk if monetary policy is normalised too quickly that parts of the economy will start to weaken," Nomura Australia senior economist Stephen Roberts, the only analysts to forecast no change yesterday, said before the announcement.

"They don't have too much economic growth and they don't have a compelling inflation smoking gun," he said. "They should move slowly."

Inflation cooled to the slowest pace in 10 years, gaining in the third quarter by an annual 1.3 per cent, after advancing 1.5 per cent in the previous three months. Policy makers aim to keep inflation between 2 per cent and 3 per cent on average.

Building approvals unexpectedly dropped in October for the first time in five months, and manufacturing grew in November at a slower pace as companies reported fewer new orders and a faster decline in inventories, reports yesterday showed.

Stevens is under pressure to raise borrowing costs as a rebound in demand for commodities such as iron ore, coal and gas prompts energy firms to increase spending.

GROWTH PATH
* It is 18 years since Australia had a year in which GDP did not grow.
* It avoided recession this year despite the global financial crisis.
* The economy grew by 1 per cent in the first half of the year.
* It is forecast to return to 3.25 per cent growth next year.

- BLOOMBERG