The Reserve Bank of Australia (RBA) felt a hike to 4.25 per cent, the fifth in six policy meetings, was needed because surging prices for iron ore and coal exports would boost the economy more than expected just a few months ago.
The hawkish tone to the minutes of its April meeting led some investors and analysts to bet it may raise rates yet again by another 25 basis points as early as May.
“A swift move to get back to normal levels seems almost certain,” said Bill Evans, the chief economist at Westpac.
“We think that the next move will be in either May or June, and on balance, the very clear emphasis on the resources boom tips the scales towards May.”
The market seemed to agree that further rate rises should come sooner rather than later. The Australian dollar rose to US$0.9275 (RM2.97) after the minutes, from US$0.9256 before.
Implied rates showed the chance of a move in May edged up to 28 per cent, from 25 per cent, while interbank futures implied a 64 per cent of a hike in June.
The minutes showed the RBA thought at the April meeting that rates were “a little below average”, and that the April move was a step in the process of returning them to “normal” levels.
“The prospective rise in the terms of trade was now likely to be noticeably stronger than had been expected was a factor suggesting that it might be prudent not to delay adjustment,” the minutes said.
Many private-sector economists believe the “average” or “normal” level of rates that the RBA refers to is between 4.5 and 5.0 per cent.
That seemed to be in line with what the RBA thinks. Governor Glenn Stevens said last month rates may rise to between 4.5 and 5.0 per cent.
Yet, with the domestic economy growing so strongly, some economists predict the RBA may lift rates to beyond 5.0 per cent this year to shift policy settings to a tightening mode.
“The bank will inevitably pause at some point, but the boost to income from the boom in the terms of trade will see the cash rate lifted to 5.25 per cent by the end of this year and 6.25 per cent by the end of next year,” said Felicity Emmett, an economist at RBS.
That is more hawkish than the market’s bets for rates to rise to 5.0 per cent in 12 months time .
A record mining boom
A healing world economy that is lifting factory production, as well as China’s insatiable demand for commodities, have helped Australian miners to win steep price hikes for iron ore and coal, the country’s two biggest exports.
Iron ore prices alone are set to rise 90 per cent or more this year, delivering extra export earnings worth perhaps two percentage points of Australia’s gross domestic product.
So big is the windfall that some analysts are calling it Australia’s biggest mining boom on record.
In line with that, analysts expect Australia’s terms of trade, or the amount earned from exports for every dollar spent on imports, to grow between 15 and 20 per cent over the next year.
That is far bigger than what the RBA anticipated in February, when it predicted growth of around 5 per cent or less.
Despite the trade surprise, the RBA stuck to its forecast for 2010 growth to come within trend levels, and for inflation to be at 2.5 per cent, right in the middle of its 2.0-3.0 target range. But some analysts reckon the RBA may soon have to raise its forecasts since the economy could well be growing above trend.
“It seems blindingly obvious that the Australian economy is already growing above trend - the unemployment rate falling for the past six months is as good an indicator of this as anything,” said Peter Jolly, an analyst at National Australia Bank who sees rates at 6.0 per cent by the end of 2011.
“Very soon they will need to shift their rhetoric and logic and start talking about taking interest rates to restrictive levels,” he said.
