Australia's central bank chief says interest rates are "pretty close" to average after five hikes in seven months, but has left the door open for more moves to control inflation as the economy revives.
Reserve Bank of Australia (RBA) governor Glenn Stevens said booming export prices and business investment would lift economic growth to around trend this year. But he also noted that consumers had been uncharacteristically cautious in spending and could decide to save more than in past recoveries.
The Australian dollar fell immediately after the comments.
The local unit fell to 92.37 US cents from 92.55 US cents before the speech, while May inter-bank futures moved up one tick as investors priced in less chances of a rate hike next month.
The central bank has raised its key cash rate by 125 basis points in five steps to 4.25 per cent and flagged further hikes toward a more "normal" level, which analysts see as between 4.5 and five per cent.
"The Reserve Bank has moved early to raise the cash rate to levels that deliver interest rates for borrowers and depositors more like those that have been the average experience over the past 10 to 12 years," Mr Stevens said in a speech to a business forum. "Those interest rates are now pretty close to that average."
The question of where rates went from there was an "open one", he added. "The Board's focus will be on doing our part to secure a durable expansion and on achieving the medium-term target for inflation of 2-3 per cent on average," Mr Stevens said.
Mr Stevens highlighted the importance of figures on consumer prices, due next week, which would allow the central bank to update its thinking on the future course of inflation.
Investors are pricing in around a 70 per cent chance of a further rise to 4.5 per cent by June, and generally expect rates to reach five per cent by year-end.
Mr Stevens again highlighted the importance of strong Asian demand for Australian commodities that has delivered huge rises in the price of iron ore and coal, its two biggest exports.
This meant Australia's terms of trade, the ratio of export prices to import prices, would probably near the 50-year peaks seen in 2008 before the global financial crisis hit.
That in turn was driving a once-in-a-century boom in business investment as mines expanded to meet demand. Mr Stevens estimated investment as a share of gross domestic product (GDP) could rise by one to two percentage points over the next four to five years.
Spending on public infrastructure and home building was also rising to meet a rapidly growing population.
"This big picture view is why we expect that, short of something serious going wrong in the global economy, Australian growth in 2010 will be a bit faster than in 2009 – at something close to trend," he said. The economy grew by 2.7 per cent in 2009 and analysts consider trend to be around 3.25 to 3.5 per cent.
But Mr Stevens also noted that the unwinding of policy stimulus was pulling in the other direction.
"It is noteworthy that, although measures of consumer and business confidence suggest that people are essentially quite optimistic about the future, a degree of caution still characterises consumer spending decisions," he said. "Some areas of retail sales are quite soft."
It was also possible households might chose to save more and take on less debt than during past economic upswings.
"So the outlook for demand seems likely to be driven more by investment, both private and public, and less by consumption than in some previous periods," Mr Stevens said.
