Australia Looks to Faster Growth and Higher Rates
Filed at 8:44 p.m. ET
*Australia govt sees faster economic growth, smaller deficits *National house prices jump 4.2 pct to record high in Q3
*Central bank likely to raise rates 25bps to 3.5 pct Tuesday
SYDNEY, Nov 2 (Reuters) - Australia is set for faster economic growth and shrinking budget deficits as it outperforms much of the developed world, the government said on Monday, feeding expectations for a rise in interest rates this week. The sweeping improvement in the Labor government’s economic forecasts came as data showed national house prices jumped to a record high last quarter, a stark contrast to countries like the United States and Britain and another reason to pull back on stimulus.
“A quarter-point rate hike looks done and dusted for tomorrow,” said Brian Redican, a senior economist at Macquarie. “The strong recovery in house prices and the government’s revisions, which we see as cautious, are all grist to the mill.” The Reserve Bank of Australia holds its monthly policy meeting on Tuesday and is widely expected to lift its 3.25 percent cash rate for a second month running. A Reuters poll of 21 analysts on Friday found 16 expected a rise to 3.5 percent, while four tipped a bold move to 3.75 percent.
The RBA’s decision will be announced at 2:30 p.m. (0330 GMT), along with a brief statement. The central bank raised rates by 25 basis points early in October, becoming the first in the G20 to tighten since the global credit crisis blew up. Australia was almost alone among developed economies in dodging recession, thanks in part to aggressive stimulus, a sound banking (OTCBB:SNBN) system and Chinese demand for its commodities. Its relative outperformance was highlighted by the Labor government’s mid-year financial review.
The government now sees economic growth of 1.5 percent for the year to end-June 2010, compared to a contraction of 0.5 percent just six months ago. It also markedly lowered its forecast for the peak in unemployment to 6.75 percent, down from 8.5 percent previously.
That in turn meant smaller budget deficits in years to come, with Treasurer Wayne Sswan predicting a return to a surplus as soon as 2015/16.
PERKY HOUSE PRICES Key to that outperformance was a resilient housing sector no fax payday advances.
The government’s measure of national house prices rose 4.2 percent in the third quarter, from the previous quarter, handily topping forecasts for a 3.0 percent increase.
That left prices up 6.2 percent on the year, recovering all the losses suffered during the global credit crisis and even surpassing the previous peak from early 2008.
The central bank is not entirely pleased with this strength, however, warning that rising house prices have a social cost. It was a bubble in house prices that ultimately led the United States into its worst recession since the 1930s. “With unemployment fears easing and consumer and business confidence soaring, low interest rates in the past six months have sparked a remarkable comeback in house prices,” said Spiros Papadopoulos, an economist at National Australia Bank. (OOTC:NABZY)
“But the latest large gains are not sustainable, adding to the need for the RBA to continue on its tightening cycle.”
Still, there was favourable news on inflation on Monday as a private gauge of price pressures fell to its lowest in seven years. The TD Securities-Melbourne Institute’s measure dropped 0.3 percent in October, slowing the annual pace to 1.2 percent.
That was the sixth straight month under the RBA’s long-term target of 2 to 3 percent.
“Purely on inflation grounds there could be a case for pausing,” said TD’s senior economist, Annette Beacher.
“However, as the RBA places more weight on Australia’s export outperformance and strong trade links with China, a revival of house price inflation and the gradual normalising of market conditions, this means another hike to 3.5 percent remains the highest possible outcome,” she added.
The RBA has said it wants to gradually remove stimulus and move rates toward neutral, which analysts tend to see as anywhere from 5 to 6 percent. Opinion is divided on how quickly it might get there, though more than a few think it could be as soon as the end of next year.