A declaration by Reserve Bank chief Glenn Stevens that the bank would not be ”timid” about raising interest rates has led financial markets to tip seven interest rate rises in a row, while the dollar has surged to 92.23 US cents.
In an unexpectedly hawkish speech in Perth, Mr Stevens fuelled speculation that last week’s interest rate rise would be just one of a series, as the Reserve rapidly unwinds the interest rate cuts delivered late last year to shield borrowers from the global financial crisis.
Mr Stevens said interest rates had to be adjusted towards more normal levels as the economy recovered. He described last week’s rise as ”a step in that direction”, and made it clear the Reserve would not be ”too timid to lessen that stimulus in a timely way”.
”The need for such an expansionary setting of policy has passed,” he said. ”It is sensible and prudent to begin to remove it, and increasingly imprudent not to do so.
”The very low interest rate settings were designed for a weaker economy than we are, in fact, facing. That is not a problem. That is a very desirable situation. It is a welcome contrast to the experience of other countries.
”The period of greatest weakness in the Australian economy has probably passed. Barring another serious international setback, the economy is likely to continue on a path of gradual expansion during 2010.”
Financial markets responded by pricing in the most rapid series of interest rate rises Australia has seen for 15 years. Markets now predict that the Reserve board will raise rates at seven consecutive meetings, lifting its cash rate from 3 per cent 10 days ago to 4.75 per cent by May and 5 per cent by July.
Such an escalation would raise the cost of servicing a typical $275,000 mortgage by $335 a month from the levels applying at the start of last week.
The currency markets also seized on the Reserve Bank governor’s comments to drive up the Australian dollar by 0.75 US cents in an afternoon, as it continues to hurtle towards parity with the US dollar – or, potentially, beyond it.
Mr Stevens dismissed a question on the risks created by the currency’s surge. ”We’ve got one of the best-performing economies in the world,” he said. ”People here are confident about the future, and foreigners are confident about our future. It’s not surprising that they’re interested in our currency, given the condition of some other countries.”
Opposition housing spokesman Scott Morrison endorsed Mr Stevens’ view that the threat has passed, and called on the Government to wind back its ”reckless and wasteful stimulus spending” or force the Reserve to raise rates even higher. But Treasurer Wayne Swan said the stimulus was being gradually withdrawn, as intended.
?The Bureau of Statistics reports that Melbourne and Hobart now share the lowest unemployment rate of any state capital, with 5.5 per cent of their workforce jobless in September.
Canberra has easily the lowest unemployment rate of the main cities at 3.4 per cent, while the Gold Coast has the highest at 6.4 per cent.