November 6, 2009 / 5:00 AM / 10 years ago

RPT-UPDATE 1-Australia cbank sees gradual rate rise, good times

 * RBA says gradual rate rises needed, no guidance on
 * Paints a glowing outlook for the economy longer term
 * Widening rate gap, investment boom should support A$
 (Repeats to additional subscribers, no change to text)
 By Wayne Cole
 SYDNEY, Nov 6 (Reuters) - Australia's central bank said on
Friday that interest rates would likely have to rise gradually
as it sharply upgraded forecasts of economic growth for next
year and pointed to a dwindling pool of spare capacity.
 Market reaction was restrained, since the central bank left
open the question of whether it would tighten in December or
not. But for long-term investors, the Reserve Bank of Australia
(RBA) laid out a tempting vista.
 Its quarterly Statement on Monetary Policy essentially held
out the prospect of an almost golden period of prosperity
fuelled by rapid population growth, rising terms of trade and a
boom in resource investment.
 "The question of whether it might hike in December just
completely misses the point," said Su-Lin Ong, a senior
economist at RBC Capital Markets.
 "The RBA here is foreshadowing years of expansion based on
resources, population and Asian demand," she argued.
 "It's big picture positive for Australia and the Australian
dollar, and means rates are going nowhere but up. All we're
doing is arguing about the timing."
 Thus while interbank futures <0#YBA:> showed a roughly even
chance of the RBA hiking to 3.75 percent in December, they were
already fully priced for a tightening to 4.50 percent by June
and at 5.0 percent or more by the end of 2010.
 The central bank lifted its cash rate by 25 basis points to
3.5 percent this week, the second hike in as many months. That
set it far apart from most other developed nations which still
have rates at emergency lows.
 Central banks from the United States, eurozone and UK all
kept policy super-loose at meetings this week. That offered the
Australian dollar an ever-widening rate premium which helped
lift it to $0.9125 AUD= by Friday, from 89 cents at the start
of the week and lows of 61 cents this time last year.
  "The RBA's statement is a picture of optimism, diminished
risks, upside growth surprises," said Annette Beacher, senior
economist at TD Securities.
 "This implies higher interest rates and an elevated
exchange rate for some time," she added. "We remain with our
target of a 4.5 percent cash rate by mid-2010 and the A$
reaching $0.95 at around the same time."
 Underlying the RBA's confidence on the economy was what it
termed a "boom" in investment in Australia's coal, iron ore and
natural gas sectors.
 "The bank's liaison with mining companies suggests that
further significant increases in mining investment and output
are likely over the years ahead," the RBA said.
 Output of coal and iron ore could expand by around one
third over the next two years if capacity came on stream as
expected, with further major increases possible over the
remaining decade.
 Liquefied natural gas production was only just coming on
stream but investment in this sector could rise from around 0.5
percent of GDP now to about 2.5 percent in the next 4-5 years.
 Ultimately, the value of LNG exports could match that of
coal or iron ore, the country's biggest earners.
 Strong demand for Australian resources from Asia,
especially China and India, meant the country's terms of trade
were expected to rise over the next year or two, a marked
improvement from the previous monetary-policy statement in
 Added to that was the rapid growth of Australia's population
and stock of capital which seemed to foreshadow many years of
expansion ahead, the RBA said.
 It more than trebled its forecast for gross domestic
product growth (GDP) for 2009 to 1.75 percent, while raising
its estimate for 2010 to 3.25 percent, from 2.25 percent
 Growth was seen running at 3.25 percent right through 2011
before accelerating to 3.5 percent in 2012.
 The RBA also nudged up its forecasts for underlying
inflation, but only modestly, perhaps reflecting its internal
expectation for where interest rates might be by then.
 Underlying inflation was seen declining from an annual 3.5
percent last quarter to 2.25 percent by the end of 2010.
Inflation was then seen travelling at 2.5 percent through 2011
and into 2012, compared to 2 percent in the previous statement.
 (Editing by Mark Bendeich)

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