N.Z. lifts rates, Australia holds steady


New Zealand has lifted rates for the fourth time this year to 5.75 percent

By Geoff Hiscock
CNN Asia Business Editor

SYDNEY, Australia (CNN) -- Australia's central bank left interest rates unchanged Wednesday, but its counterpart in neighboring New Zealand opted for a rise of a quarter of a percentage point to 5.75 percent.

It was the fourth rise since March by the Reserve Bank of New Zealand, which cited the economy's "outstanding" growth.

In Australia, the 9.30 a.m. "window" used by the Reserve Bank of Australia to signal rate moves passed Wednesday morning without any announcement, following a board meeting Tuesday.

Economists had been divided over whether the bank would lift the official cash rate from 4.75 percent, given the Australian economy's continuing strong run.

It last raised rates on June 5, the same day official figures showed the economy grew 0.9 percent in the March quarter and 4.2 percent on an annualised basis(Full Story).

Reserve Bank governor Ian Macfarlane said at the time that inflation was close to the top of the bank's target range. He said the bank's aim was to lift the cash rate towards a "neutral" setting that was neither too stimulatory nor too restrictive.

Neutral setting

Market watchers interpret a neutral setting as a rate of about 5.5 percent.


The Australian dollar has appreciated about 10 percent against the U.S. dollar so far this year

But a strengthening Australian currency, the recent turmoil in the U.S. economy and stock markets, and an expected downturn in the Australian housing sector are seen as the main factors prompting the bank to leave rates unchanged for now.

The Australian dollar has appreciated about 10 percent against the U.S. dollar so far this year, and traded Wednesday morning at 56.05 U.S. cents.

Macquarie Bank chief economist Richard Gibbs told CNN that the Reserve Bank's decision to leave rates on hold was a "prudent course", given the events of the past month.

The central bank does not give any reasons when it chooses not to act, but Gibbs said the strengthening currency was having an effect on Australian exporters, while the stockmarket "maelstrom" in the United States through events such as the WorldCom scandal also had to be taken into account by the central bank.

Housing downturn

The third key factor was the start of a downturn in the housing sector, which has been booming for the past 12 months.

In New Zealand, the RBNZ has downplayed the need for further rate rises after Wednesday morning's move.(Previous rate rise)

"If the exchange rate appreciation is sustained, or goes further, some heat will be taken out of future inflation pressures, reducing the extent to which interest rates may need to rise in the months ahead," it said.

HSBC Australia senior economist Anthony Thompson said in a note released after the rate rise that the change of tone by the RBNZ had prompted a revision to his interest rate forecast.

"We now expect one final 25bp (a quarter of a percentage point) rate hike in Q4, taking the official cash rate to a peak of 6 percent," he said. HSBC's previous forecast was 6.25 percent.

Stock markets in Australia and New Zealand are both slightly lower in early trade Wednesday.