more rate rises to come

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    RBA boss can't rule out rates rising
    Friday Apr 4 15:53 AEDT
    Reserve Bank of Australia (RBA) governor Glenn Stevens says he can't promise interest rates won't rise again in the future.

    "What I can say is the current level of rates is on the high side and at some point they can be lower," he said.

    "When they've done the job, they can come down.

    "I can't promise they won't rise again," Mr Stevens said in response to a question while appearing before the House of Representatives joint standing committee on economics in Sydney.

    Mr Stevens also conceded the central bank's forecasters underestimated the strength of domestic demand in 2007, which has led to higher inflation and rising interest rates.

    "We shouldn't be shy to admit when things were unexpected," he said.

    "I'd say we were surprised at the strength of demand in the last part of 2007.

    "We didn't predict a weak economy but we didn't predict it to be quite as strong as it turned out."

    Mr Stevens said the public should be patient as the central bank worked to reduce inflation.

    "These things take time and we have to be patient," he said.

    "I think (inflation) will come back ... I don't think you can say it will come down very quickly or very soon."

    The central bank has raised official interest rates four times since August last year to head off inflationary pressures in the economy driven by very strong domestic demand.

    The official cash rate currently stands at 7.25 per cent.

    Opposition Leader Brendan Nelson acknowledged the Reserve Bank had an obligation to use interest rates to contain inflation.

    "But it also has the responsibility to deliver full employment, to keep the currency stable and to work for the economic welfare of Australia and Australians," he told a Liberal Party lunch in Adelaide.

    "From our perspective, we would be very concerned to see the Reserve going any further than it has in recent times."

    But economists say it's not all doom and gloom, with many suggesting rates are likely to remain at current levels for some time.

    RBC Capital Markets senior economist Su-Lin Ong said Mr Stevens' comments "confirmed a wait-and-watch stance" for the RBA.

    "In a nutshell, today's testimony was consistent with a peak in cash rates and an on-hold stance for the foreseeable future," Ms Ong said in a client note.

    Ms Ong said the RBA was trying to "gauge whether tighter domestic financial conditions will generate enough of a slowdown in domestic demand to ensure a move in inflation back into target range".

    She said a tightening bias remained in place, but had been "tempered".

    The RBA looks likely to sit on the sidelines for some time and fret about inflation from there with the onus on the interest rate sensitive demand indicators to moderate further in the months ahead, Ms Ong said.

    But she said any cuts to the official cash rate were "not on the horizon".

    "Market speculation of cuts beginning later this year remains premature," Ms Ong said.

    Ms Ong said the banks' raising of their lending rates greater than the RBA's move on rates, or independent of any central bank decision, had prevented the official cash rate rising further.

    "The market has clearly done some of the RBA's work for it and may well continue to do so."

    The chairman of the House of Representatives economics committee Craig Thomson says home owners facing mortgage stress will be angry that the major banks are raising lending rates as their profits continue to climb.

    Mr Thomson, who represents the NSW Central Coast seat of Dobell, said annual bank profits had climbed to about $4 billion, up from about $1 billion five years ago.

    "To people who have mortgages, they look at that and they see their mortgage rates are going up," he told journalists as the committee took a 15 minute break from grilling the central bank.

    ©AAP 2008
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