RATES RISE - AFR ON-LINE NEWS STORY

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    Copy of story (by Jim Parker) now being carried on-line by the Australian Financial Review, in breaking news:

    "The Reserve Bank on Wednesday responded to a supercharged Australian economy and improved global fortunes by tightening policy for a second straight month, lifting its benchmark interest rate by a quarter percentage point.

    The RBA said it had decided at its monthly board meeting on Tuesday to raise the official cash rate to 4.75 per cent. Combined with a similar move in May, this restores rates to the levels prevailing before the September 11 terrorist attacks on the US.

    "The announcement came two hours before the release of national accounts, expected to show the Australian economy outpacing the rest of the industrialised world in the March quarter at an annualised rate of close to 5.0 per cent.

    This latest policy tightening was seen as a near certainty after RBA Governor Ian Macfarlane last week warned that if rates stayed where they were, there was a high risk of the economy over-heating.

    Macfarlane said rates needed to be restored to a neutral setting, which he indicated was up to 1.5 percentage points above prevailing levels. Economists said that suggested the cash rate would rise to 5.5-6.0 per cent in the coming months.

    With the Federal Reserve not expected to raise US rates until August at the earliest, the latest RBA move has raised Australia's rate premium over the US to 300 basis points, its widest level in a decade.

    Financial market economists had overwhelmingly predicted the RBA would continue this week to withdraw the unprecedented stimulus it applied last year when the world looked to be entering a coordinated recession.

    Since then, it has turned out that the US economy suffered only the briefest and mildest of recessions, Europe has shown signs of recovery and Asian economies outside Japan are growing strongly again.

    In the meantime, the Australian economy has continued to outpace the rest of the industrialised world.

    Australia has owed its outperformance to low interest rates, Federal Government housing subsidies and the stimulus provided by the massive depreciation of the Australian dollar in recent years

    While interest rates and the $A are rising, they remain well below their average levels of the past decade. The housing sector is coming off as subsidies are wound back, but the apartment market and non-residential building is still growing strongly.

    Looking to the second half of the year, official forecasters expect business investment to take over from housing as the main driver of the economy, with stronger global growth cushioning the impact on exporters of the appreciating $A."
 
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