Aussie hits year high on rate rise
By Lucy Battersby | smh.com.au | 07 October
The dollar shot up to its highest level this year after the Reserve Bank board announced a rise in the target overnight cash rate, while economists debated whether the rate increase was premature and would stifle the economic recovery.
The cash rate rose by 25 basis points to 3.25 per cent yesterday, the first move since the RBA cut rates to 3 per cent on April 7.
According to analysis by Credit Suisse, the market is pricing in a 72 per cent chance that interest rates will rise again, to 3.5 per cent, at the board's November meeting.
The dollar jumped from US87.6¢ to US88.4¢ at 2.15pm, the highest point since August last year, and at the close of business in Australia was still above US88¢. The Aussie has now risen by US27.4¢ since it hit a low on October 27.
The Reserve Bank's trade-weighted index, which measures the value of the dollar against its major trading partners, also rose, up by 1.2 per cent to 68.2 points.
The S&P/ASX 200 Index did not react to news of the interest rates rise, because most traders had anticipated it.
The index closed 18.3 points, 0.4 per cent, higher at 4591.6. Shares in the materials, energy and financial indices rose the most, while shares in the consumer discretionary index tumbled by 1 per cent.
''The market has said 'yes rates are going up, but the reason they are going up is not because [of an] inflation problem … it is because the outlook for the economy is inconsistent with maintaining interest rates at exceptionally low levels','' said Citigroup chief economist Paul Brennan.
He said the rate rise had surprised him. He had thought the RBA might have waited until the next meeting in November, but its optimistic statement yesterday about growth in regional countries and the domestic infrastructure industry fitted with Citigroup's own forecasts for economic growth in 2010.
He expects rates to be at 3.75 per cent before the end of this year because of the improved economic outlook.
''Once you start moving [rates] in one direction, you keep moving in that direction.'' The RBA said Australia's economic growth would be ''close to trend over the year ahead'', and the rate rise was designed to ''keep inflation consistent with the target'' [of 2-3 per cent] in coming years.
But Morgan Stanley's global strategist for developed markets, Gerard Minack, said in a note to clients there was no guarantee that economies would keep growing once emergency stimulus measures were removed and interest rates started rising.
''My hunch is that much of the [Asian] regional stimulus is designed to provide a buffer until developed economy demand recovers,'' he wrote.
''If that recovery is tepid - as the Morgan Stanley team expects - then there is scope for regional growth to disappoint.'' Mr Minack noted that Australia's export and import figures were still soft, and that exports were declining faster than imports.
The Australian Industry Group warned that the rise in interest rates and the dollar could ''snuff out the recovery'' by reducing domestic demand for goods and foreign demand for exports.
The high dollar has already damaged exporters' competitive edge, particularly in the non-resource sectors where foreign customers can easily buy products from other suppliers.
The economist at Meat and Livestock Australia, Tim McRae, said Australian beef producers were struggling because their customers were mostly in the US, Japan and Europe - economies that were are still in trouble.
''The rising Australian dollar is making Australia's beef in those markets more expensive'' he said.
First published by Smh.com.au on October 07 2009
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