RBA adds fuel to rate fears

By MIRANDA MAXWELL

Australia's economy is over the worst and should start to expand at a faster rate, the Deputy Governor of Australia's central bank said yesterday, cementing market expectations for higher interest rates next year.

Risks to the global economy had retreated since the bank's last public statement early last month, while farm production and non-farm exports should improve over the coming year, the Reserve Bank of Australia's Glenn Stevens said.

The comments were in line with a market view that rates will rise, but not until next year, analysts said.

"It was about as clear as it could be. He wants to move rates back [up] to neutral - it's a question of when," said Tony Pearson, of National Australia Bank.

The Reserve Bank has left rates near 30-year lows at 4.75 per cent since June 2002, but resisted a further drop. Australia's economic expansion shrank to just 0.1 per cent in the second quarter, its weakest in three and a half years.

"It's not our practice to announce a bias but I think the text of the talk gives you a fairly clear direction of the way things have been shifting," Stevens said after his speech.

A prolonged run up in Australian house prices and debt levels had made Stevens "more reluctant" to lower rates than he might otherwise have been this year.

In what RBA board member Ken Henry described as a "housing bubble," the Government's house price index rose 18 per cent in the year to June.

"Surely policy should avoid needlessly adding to the boom," Stevens said, adding that Australians should be careful not to "over indulge" in borrowing.