Normal interest rates for Australia would be noticeably higher than the current 3 per cent rate, the country's central bank governor said today, sending the Australian dollar to a 11-month peak.
In a sign that Australia could be the first major developed nation to raise rates, Reserve Bank of Australia Governor Glenn Stevens told parliament that rate increases would be made in an orderly fashion.
The central bank slashed Australian rates to record lows as it moved to cushion the economy from the global financial crisis, but recent strong data has prompted it to drop its easing bias, setting the stage for eventual rate rises.
“It's (normal rate setting) a good deal north of what the cash rate is now,” Mr Stevens said during semi-annual testimony to parliament.
“I don't want to endorse a particular number because that, I think, would trigger all sorts of excitement out there. We shouldn't have a dogmatic opinion about exactly where this so-called normal is, because for a start it's not necessarily a constant.”
The Australian dollar jumped to a 11-month high of $0.8479 from around $0.8420 before the comments as investors priced in increased chances of a rate hike before the year end.
Financial markets moved in to price in a 90 per cent chance of a quarter percentage point rate rise in November, from around 72 per cent before his comments.
“Stevens' comments were decidedly upbeat,” said Su-Lin Ong, senior economist at RBC Capital.
“As we have been arguing, the abnormally low level of cash rates is becoming increasingly inappropriate against the improving global backdrop and upside surprises in the local data.”
Analysts are more cautious than markets and in a July 31st poll most of them predicted the first rise to come in the first half of 2010, though Mr Stevens said he did not want to give a particular steer on when any change of policy might happen.
“On the timing of when we might adjust policy, that's an issue about which one keeps an open mind at this point, obviously,” he said.
“When we reach the point of judging that this exceptional degree of stimulus isn't needed, it will be the right thing to do to start removing it before it's excessive for too long.”
Reuters