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Australian Interest rates will stay steady for at least another two months after the
Reserve Bank today kept the official rate on hold at 4.75 per cent. The decision
was widely expected after the RBA’s surprise move last month prompted the big
banks to lift mortgage rates well beyond the official 25 basis-point rise. HSBC
economist Paul Bloxham said last week that today’s decision was “almost a fait
accompli” after mortgage rates rose by about 40 basis-points in November, “which
is plenty of tightening for now”. After today’s board meeting, the RBA will not
meet again until February,

the Herald Sun reports.
In a statement detailing today's rate decision, RBA governor Glenn Stevens said there continued to be "a degree of caution" in consumer spending and borrowing, which has led to "a noticeable increase" in the household saving rate. "Following the board's decision last month to lift the cash rate, and the subsequent increases by financial institutions, lending rates in the economy are now a little above average," Mr Stevens said. "The board views this setting of monetary policy as appropriate for the economic outlook."

A 25 basis point increase to the official rate would have added about $50 a month to a $300,000, 25-year home loan, according to research company Canstar Cannex. All 15 economists surveyed earlier by AAP forecasted the central bank would leave the overnight cash rate at 4.75 per cent. The meeting followed weak economic data last week showing the Australian economy grew 0.2 per cent in the September quarter for an annual pace of 2.7 per cent and retail trade fell 1.1
per cent in October. "The 'super-sizing' by the commercial banks all but liminated the need to do much more near term," JP Morgan chief economist Stephen Walters said yesterday. Last week's data also showed tepid economic growth in the September quarter and an unexpectedly weak result for October retail sales, giving the (RBA) more flexibility on its next move. The jump in
mortgage rates, aside from the uproar from customers and politicians of all stripes, has caused a change of behaviour among borrowers.

According to Mortgage Choice data, almost 11 per cent of all home loans approved in November were fixed rate, compared with 7.7 per cent in October, as borrowers sought certainty in their
monthly repayments. Such mortgages accounted for less than one per cent of approvals in January. Another broker, Loan Market, has also faced a flood of inquiries from people wanting to reduce their home loan by moving to a smaller house. Treasurer Wayne Swan is expected to announce a suite of measures this week to encourage more banking competition by promoting smaller banks, building societies and credit unions.

For the full story please visit www.news.com.au

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THE Australian dollar has reached another post-float 28-year high against the US dollar.

The dollar exchange rate reached its record high of 100.57 US cents in early trade today, another post-float 28-year high.

Australia's push above parity with the US dollar rate will have a mixed impact on the economy, Prime Minister Julia Gillard said.

"This is a mixed thing. It's good for some industries and bad for others,'' Ms Gillard said on the Nine Network.

"If you rely on imported components to do what you do, then it makes a good difference. But if you're competing for things like tourism, international education, it makes it really tough."

Buy US dollar slid overnight, briefly touching a nine-month low against the best euro exchange rate, after the Federal Reserve said it would spend US$601 billion to buy US government bonds in an effort to boost the economy.

Investors had expected the Fed's action for months, since Ben Bernanke, the central bank's head, hinted at the move in a speech in late August.

To Read more please visit www.news.com.au

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Australian Dollar Outlook

THE Australian dollar exchange rate is expected to stay above 90 US cents throughout 2011 as the Reserve Bank continues to raise interest rates.

Australia's resource sector is also tipped to prop up the domestic economy, replacing stimulus spending as a key driver of growth.

The "high-flying" Australian dollar should stay well supported for a while longer, Access Economics said in its latest Business Outlook report.

The forecaster's director Chris Richardson said he envisaged the Australian dollar rate staying above 90 US cents throughout 2011, but not going much beyond parity.

"We face roughly a year with the dollar being strong," he told AAP.

The Reserve Bank is also tipped to keep raising interest rates next year as wage costs put pressure on inflation.

"Australia's economy continues to dance to the beat of a different drum, and continuing good economic news and the coming inflection in inflation are likely to see the Reserve Bank raising rates again," the report said.

The cash rate was tipped to climb from 4.5 per cent at present to 6 per cent by the end of 2011, with the central bank tipped to raise the cash rate at least once before Christmas.

The report said business investment in the resources sector would be "absolutely vital" to Australia's economic recovery, replacing public stimulus spending as a growth driver.

"We need to see the likes of the Gorgon project and other resource spending take the baton of growth from the construction of school halls," it said.

This would offset sluggishness in the retail and housing construction sectors, the report said.

By the end of next year, Australia's terms of trade was expected to fall as a greater global supply of resources caused commodity prices to "return to earth".

The central banks of other advanced nations, including the US, would also start to lift interest rates.

This would diminish Australia's interest rate differential with other advanced economies and see the local currency fall off its highs, Mr Richardson said.

When it came to politics, Access Economics had misgivings about a minority government offering "a bucket of bribes" to the regions and promoting populist economic policies.

"They're not going to risk political capital going for the right thing," Mr Richardson said.

He cited shadow treasurer Joe Hockey's call to regulate bank interest rates as an example of irresponsible politics, and urged the government to refrain from erecting new trade barriers, subsidising old industries and reaching for regulation without checking if its costs outweighed benefits.

"And don't chase the chimera of 'supporting jobs' in an economy that is already close to full employment," Access said.

Access Economics is expecting consumer price index data for the September quarter to show an annual growth of 2.9 per cent and a quarterly pace of 0.75 per cent, when the figures are released tomorrow.

To Read more please visit

www.news.com.au

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Australian dollar's impact on company profits

THE Australian dollar's impact on company profits should be a mixed bag this reporting season.

On one hand, a more than US Dollar 8c decline against the greenback after the dollar punched above US94c in November would have come as a welcome relief to businesses with big US exposures, The Australian reported.

"If anything, that is going to provide a modest boost to earnings," said UBS chief strategist David Cassidy.

But its stellar march forward against the euro is likely to have dented the profitability of companies with operations in Europe. "For companies with big euro rate exposure, that is going to be a pretty clear headwind," Mr Cassidy said.

Last financial year was a roller-coaster 12 months for the Aussie Dollar. After breaking through US94c in November, it was sold down heavily in May to a low of US80.65c, as concerns over Europe's debt crisis intensified.

Fat Prophets analyst Colin Whitehead said the dip would have benefited exporters such as Foster's, which would have been able to compete more effectively on price. "Then you have the broader macro effect of tourism - during periods of Australian dollar weakness the tourism industry will benefit from more overseas visitors."

By the end of the financial year, the Australian dollar Rate had recovered more than 6 per cent to end the year at US85.53c, limiting its effect on local groups with US operations.

RBS equities strategist Greg Goodsell said he would be surprised if the dollar, against the greenback, was a big factor this reporting season.

"In the last 12 months it has averaged between US78c and US92c, so it has been in a reasonable range, whereas during the GFC it went down to the low 60s," he said.

He said Australian stocks generally did not take naked currency risk any more. "Most of them manage their exposures pretty well - they either put financial hedges in place if they have a significant degree of risk or do natural hedging, so if they have US dollar assets they will typically fund themselves in US dollars," Mr Goodsell said.

"Because of that, the currency has to move a long way to have a big impact on earnings results."

But Mr Cassidy said there could be some euro-related downgrades to watch for due to the dollar's strength against the euro exchange rate.

Last financial year, the dollar surged about 20 per cent against the euro, reflecting the differing outlooks for the Australian and euro-zone economies. "Obviously there are lots of moving parts as to how the business is actually going operationally, but companies like Amcor and Brambles do have big European operations," Mr Cassidy said.

To Read more please visit

www.news.com.au

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Australia does not have a speculative housing bubble

THE Reserve Bank has warned lenders and borrowers to be prudent while giving an assurance that Australia does not have a speculative housing bubble on its hands.

Fears of a property bubble emerged after the Australian Bureau of Statistics house price index rose 20 per cent in the year to March.

But RBA head of financial stability Luci Ellis said Australian house prices have recovered their small decline from 2008 to post increases of between about 12 to 15 per cent over the past year in capital cities, depending on the measure.

Ms Ellis said recent data suggested Australia does "not have a credit-fuelled speculative boom on our hands".

"It would not be desirable for the current situation to turn into one," she said in a speech.

"It will therefore be important for lenders to remain prudent in their standards.

"It will be equally important for prospective borrowers to have realistic expectations, and not to rely on a hoped-for capital gain in order to service their debts."

She told a residential property conference housing prices have been under upward pressure in Australia, with most short-term drivers coming from the demand side following the increased first home-buyers grant, low interest rates and lower than expected unemployment.

"The nature of the demand shock Australia faces means that it would be helpful if more of that demand could be accommodated with extra homes for occupation, instead of by higher prices," she said.

"Some of that pick-up in construction does seem to be happening."

She said the supply of housing was always going to be quite "sluggish".

"But whatever the causes, the ability to add to supply is falling short of this higher rate of population growth, despite some pick-up recently," she said.

"Naturally that is putting upward pressure on housing prices."

Ms Ellis said it would be "desirable" for the supply of new dwellings to become more flexible than it had been to date because extra people need somewhere to live, and both house prices and rents could rise.

The more that housing prices rise, the more some people might feel they must stretch their finances to buy a home, she said.

Another concern was that if too much of the response to faster population growth comes as faster growth in housing prices, this could be "built into people's expectations".

"If price expectations become over-optimistic and encourage too much investor demand, the result could be disappointment, or worse," she said.

She also said fewer households had bought their homes without debt.

Across the mortgage market, lending standards were now a little tighter than they were a few years ago and the fraction of low documentation loans was now lower than it was two years ago for both owner occupiers and investors, she said.

As well, only a minority of recent home loan borrowers started with a loan to value ratio above 90 per cent, she said.

Ms Ellis also revealed the RBA has been carefully watching lending standards in the important first-home buyer market segment.

"First-home buyers have long faced greater risk than more established home owners who have more equity in their home," she said.

"But as far as the data allow us to tell, recent new loans to first-home buyers look quite like those made to previous cohorts of first-home buyers."

To Read more please visit

www.news.com.au

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Australian Dollar will continue to strengthen against the euro and the pound.

Parity talk time again for the Aussie

Almost two years since the Australian dollar touched generation-high levels against the
US dollar rate at almost 98 US cents, debate over whether and when the Aussie dollar will exceed the greenback in value is back.

The Reserve Bank's move this week to raise its cash rate again sparked fresh impetus to the Aussie dollar's rise. The central bank's signal that more rate rises are ahead also added to the currency's relative allure.

And economists are dusting off the history books to assess the currency's rise against other
currencies, particularly those in Europe. The Aussie dollar remains at record levels versus the euro, where it's trading just below 70 euro cents, while it hasn't bought this many UK pence (currently about 61) in 25 years.

AMP Investor chief economist Shane Oliver believes the relative strength of Australia's resource-based economy will push the Aussie dollar, currently buying 92.9 US cents, to parity against the greenback before the year is out.

Indeed, Mr Oliver says the local dollar's recent rise is bringing it back into line with its longer-term averages. While it's traded at less than par with the US dollar since its float in 1983, Australia's dollar had been worth more than the greenback for the great bulk of the country's history, particularly during the era before the switch to a decimal currency in 1966.

''Back in 1901 the equivalent of one Australian dollar bought $US2.40 and for most of the last century the Australian dollar was above parity against the US dollar,'' Mr Oliver said, in a note to clients.

''It is likely the sub-parity period from the 1980s was the aberration for the Australian dollar and the improvement in Australia's relative fundamentals suggest it is likely the Australian dollar is going back above parity against the US dollar.''

The Aussie has risen 1.5 per cent in the past month alone against the US dollar, or 3.6 per cent since the beginning of the year, making it among the top five performers among major currencies during the period, according to Bloomberg data.

RBA outlook

Bolstering the local dollar's recent rise has been the Reserve Bank's series of five interest rate rises since October to 4.25 per cent. With the US Federal Reserve's lending rate remaining near zero, the gap between the two interest rates is the widest since 2008.

That gap may widen further, with financial markets betting on another four RBA interest rate rises over the coming year to prevent the economy expanding too fast. The unemployment rate now sits at 5.3 per cent, and may drop below 5 per cent before the end of 2010 - about half the current jobless rate in the US.

To be sure, at less than 93 US cents, the currency still has a fair way to go before parity is reached. Even so, NAB expects the Aussie dollar to trade at parity levels in the second and third quarters of this year, while overseas banks Nomura and Standard Chartered Bank are among those predicting parity by the final quarter of 2010. ANZ economist Amber Rabinov, though, forecasts the Australia dollar's rise will stall in the mid-90 US cent levels as worries resurface about the health of the global economic recovery.

''The continued depreciation of the euro versus the US dollar due to a lagging Euro zone recovery and sovereign credit concerns should cap gains in the Australian dollar,'' Ms Rabinov said.

Nonetheless, she said the Australian Dollar will continue to strengthen against the euro
and the pound. Other analysts are more pessimistic, though, seeing the Australian dollar
retreating over the year as investors grew skittish again about risk as troubles re-emerge in Europe, the US, and China.''I'm more a believer that the Aussie will end the year closer to 80 US cents rather than parity,'' said Arab Bank Australia Treasury Dealer David Scutt.

''We are only an economy of 22 million people and completely reliant upon the happenings offshore, a fact that many people have forgotten since the recovery process began.''

Mr Scutt said some countries, particularly in Europe, will struggle to meet their debt repayments, sapping the global appetite for currencies deemed to be relatively risky, such as the Australian dollar.

To Read more please visit

www.smh.com.au

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