Australian rates close to average

A little below average would imply that they are not far from an initial pausing point but not there yet. (SUPPLIED)

Australian interest rates are rising back towards average from very low levels and are now close to what policymakers consider normal, said a top central banker.

Guy Debelle, Assistant Governor of the Reserve Bank of Australia (RBA), told a Senate inquiry into finance for small business that the central bank was not trying to depress consumer demand by raising interest rates. Rather, it aimed to ensure growth could be sustained.

"We decided that the situation where we needed historically low interest rates are no longer necessary and we are moving back to something around about average levels, which is not far away from where we are at the moment," Debelle said.

Just last week, the RBA raised its key cash rate by 25 basis points to a 14-month high of 4.25 per cent and flagged more hikes in coming months as the economy recovered from the economic downturn at a much faster pace than expected. The central bank has raised rates five times in six policy meetings from a low of three per cent in September.

Investors are pricing in a 28 percent chance of a rate hike in May, while the cash rate is expected to be raised by 95 basis points in the next 12 months. That would take the cash rate to above five per cent. Markets showed limited reaction to Debelle's comments since they largely reflected investor thinking.

Most focus was on reaction to weekend news that euro zone finance ministers had backed a rescue package for Greece.

"These remarks seem pretty much in line with recent RBA views; a little below average would imply that they are not far from an initial pausing point but not there yet," said David de Garis, senior economist at National Australia Bank.

The central bank has indicated that average rates could be somewhere in the range of 4.25 per cent to 4.75 per cent.

Some analysts reckon an astonishingly solid labour market and prospects for a huge windfall from higher iron ore and coal prices could mean rates will have to rise above average over time.

Debelle said the Australian economy was growing around trend, having improved much more quickly than the central bank had expected. Historically, trend growth has been around 3.25 to 3.5 per cent.


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