SYDNEY, Nov 5 - Australia's central bank raised interest rates on Wednesday by a quarter percentage point to rein in soaring consumer debt and a property boom, the start of what markets expect will be a global round of rate increases. The Reserve Bank of Australia (RBA) lifted its official cash rate to 5.00 percent from 4.75 percent, the first change in 17 months. The Bank of England is expected to be the next in line. The Reserve Bank, which has held the cash rate close to 30-year lows since June 2002 during a severe drought, said it was clear from the behaviour of borrowers that such low rates were expansionary and no longer necessary. "The strength of demand for credit increases the danger associated with delaying a tightening of policy," the central bank said in a statement on Wednesday. Markets immediately looked for more rate rises from the RBA.
"This is the beginning of a series of moves," said Su-Lin Ong, senior economist at RBC Capital Markets. "You couldn't rule out a December move. They would like to get to around 5.50 (percent) relatively soon," she said. The move increases the yield on the Australian dollar to a 400 basis point premium over the U.S. dollar. The currency surged more than one percent to a fresh six-year high of $0.7118 after the announcement while the implied yield on front-month bill futures jumped to 5.36 percent from 5.17 percent as the market priced in a December rate hike.
CLEAR MESSAGE
"The tenor of the Bank's statement sends a clear message," said Glenn Maguire, an economist at SG Australia. He expected another 25 basis point rate rise in December and a peak of 5.5 percent this cycle, possibly as soon as March next year. "The Bank will be making the price of credit considerably less attractive in the short term," said Maguire. A recovery in Australian exports after severe drought, SARS and poor offshore demand finally gave the Bank licence to move. Heading into this week's central bank board meeting, the market was certain of the likelihood of a rate rise, just not the exact timing, as analysts agreed the central bank needed to deal with soaring property values and debt levels. House prices have doubled over eight years and rose 18 percent in the year to June 2003, while household debt was rising at more than 20 percent. "That is a much faster rate of growth than can be expected to be consistent with economic stability over the longer run," the Reserve Bank said on Wednesday. "This growth has been sustained for some time and at present shows no sign of abating." A surprise 7.2 percent jump in annualised U.S. GDP in the third quarter was also supportive of a tightening. The United States is Australia's second largest trading partner after Japan. The Reserve Bank may want to squeeze in a moderate tightening cycle ahead of a national election expected late in 2004, to avoid complicating the political debate. Australian Treasurer Peter Costello said after the rate hike he thought the world economic recovery was still "faltering". The Bank of England's policy-making committee meets later this week and is thought to be considering a tightening but the United States has said it would keep rates low for some time. The Reserve Bank's statement said domestic economic expansion was likely to be above trend in the coming year. Inflation would decline but "the risks to that forecast are beginning to tilt upwards", it said. The Bank delivers a detailed quarterly update on Monday. (US$1=A$1.41)//