AUSTRALIA'S economic strength is likely to drive interest rises higher, with the Reserve Bank's governor today saying expected weakness in the local economy had not materialised.
“The very low interest rate settings were designed for a weaker economy than we are in fact facing,” RBA governor Glenn Stevens said.
“Plainly, the downside risks to which the board was responding earlier have not materialised,” he told a gathering in Perth this morning.
The dollar jumped from US91.55c to US91.73c on Mr Stevens's comments, and within minutes had hit a high of US91.87c. Higher rates make the local currency a more attractive option for investors.
Financial markets believe a 25-basis-point rise in November is a dead certainty. And Credit Suisse data show the market believes there's a 37 per cent of a 50-basis-point, or half-a-percentage point, rise on Melbourne Cup Day.
Another 25-basis-point rise would add about $40 to the monthly payments on a $300,000, 25-year mortgage.
In the aftermath of the financial crisis, the RBA cut 425 basis points from the official cash rate as it sought to cushion Australia from a harsh downturn.
Since then, the Australian economy has proven more resilient than originally expected.
This month, the RBA took its first step in the opposite direction, raising the 49-year-low rate of 3 per cent to 3.25 per cent.
“If we were prepared to cut rates rapidly, to a very low level, in response to a threat but then were too timid to lessen that stimulus in a timely way when the threat had passed, we would have a bias in our monetary policy framework,” said Mr Stevens in the speech, given at a Perth breakfast hosted by the Financial Services Institute of Australasia.
“Experience here and elsewhere counsels against that approach.”
In the speech, Mr Stevens reiterated the RBA's goal of trying to assure that the inflation rate remains between 2 and 3 per cent, allowing the economy to strike a “good balance” between short-term demand in the economy and long-term prices.
The June quarter Consumer Price Index stood at 1.5 per cent, falling below 2 per cent for the first time since the September 2007 quarter.
Mr Stevens said he believed current monetary policy was working.
“In fact, it is a very desirable situation,” he said.
“It is a welcome contrast to the experience of a number of other countries. It is simply something we need to recognise in setting monetary policy – which means not holding interest rates at very low levels when that is no longer needed.”
Mr Stevens said it was prudent for the central bank to raise rates last week.
Asked if it was a mistake to raise the rates at that time, he said: ‘‘No, the rate rises were not a mistake, they were necessary.
‘‘The logic for last week’s change was the need for such an expansionary policy ... has passed. It is sensible and prudent to remove them.’’
Mr Stevens also reiterated the importance of the bank guarantees, saying to have them ‘‘when we did was the right thing to do’’.
Mr Stevens said housing prices were very high in Australia but he personally thinks it is a social issue.
‘‘The issue of housing prices is not so much a monetary policy issue,’’ he said.
High $A here to stay
The Australian dollar's high: get used to it, because it's here to stay and it'll be good for most of us, Sydney Morning Herald economics editor, Ross Gittens, said this morning.
Farmers won't like it. Manufacturing exporters won't like it.
But he said the strong $A reflects the underlying strength of the Australian economy driven, in particular, by the fast growing Asian economies and their huge demand for mineral resources, energy, which we can supply, and by Asia's demand for our agricultural exports.
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