Business strength points to Aust. rate rise


Australian Treasurer Peter Costello says "sound fundamentals" are helping insulate the economy from offshore shocks

CNN's Geoff Hiscock
Asia business editor

SYDNEY, Australia (CNN) -- Expectations are growing in Australia that interest rates will begin moving up from mid-year, following the release of strong economic growth figures and more signs of a U.S. upturn.

Business confidence is high, with the National Australia Bank monthly survey released Tuesday showing "very robust levels" that point to growth of up to 3.75 percent in 2002.

The NAB -- Australia's biggest bank -- said the main message from its survey was that Australia's strong growth momentum of 2001 is continuing into the first quarter of 2002.

Australia's economy has been on a consumer-led run, with national accounts figures last Thursday showing better than expected growth of 4.1 percent in 2001.

Forecasters such as HSBC Australia senior economist John Edwards believes the central Reserve Bank of Australia will start to tighten rates in June.

The official cash rate now is 4.25 percent, the lowest level in about 30 years.

N.Z. may act first

In a commentary this week, Edwards said he expected both Australia and New Zealand to begin lifting rates before the U.S. does, with New Zealand's central bank tightening in May and the Australian central bank acting in June.

Others see the first Australian rate rise coming early in the second half of the year.

Salomon Smith Barney co-head of economic research Stephen Halmarick told CNN last week that he expected the first move will be in August or September.

Halmarick said rates would likely hit 5 percent by the end of the year and 5.5 percent in 2003.

National Australia Bank chief economist Alan Oster agrees with this scenario. Releasing the NAB's business survey Tuesday, Oster said the first rate rise may well come "earlier rather than later" in the September quarter.

"Overall, we still see the official cash rate being increased by around 1.25 percent in total, bring the rate back to around 5.5 percent by mid/early 2003," Oster noted.

ACCI pushing for more reform

Westpac Bank's general manager of economics Bill Evans expects rates to reach 5 percent by the end of the year and go as high as 6 percent next year, according to Australian Associated Press.

Evans made his comments Tuesday at the release of a survey of industrial trends that Westpac sponsored with the business lobby group, the Australian Chamber of Commerce and Industry (ACCI).

The ACCI is pushing for further economic reform in Australia, saying that past reforms enabled it to escape the worst of the current global downturn.

"There is now an absence of clear government advocacy for ongoing reform. This is disappointing and puzzling," acting chief executive Lyndon Rowe said Monday.

After national accounts released by the Australian Bureau of Statistics last Thursday showed the Australian economy grew by a seasonally adjusted 1.3 percent in the December 2001 quarter over the September quarter, Australian Treasurer Peter Costello said the country's "sound fundamentals" were playing their part in insulating Australia.

Economic commentators agree that along with the six interest rate cuts made by the Reserve Bank during 2001, one key factor in Australia's strong run is its competitive currency.

The Australian dollar traded at about 50 to 52 U.S. cents for most of 2001, touching a record low of 47.75 cents last April when the global slowdown appeared to be at its worst.

It traded Tuesday at 52.20 cents. Both Salomon Smith Barney's Halmarick and HSBC economist Grant Fitzner are forecasting it will reach 55-56 cents later this year.