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Reserve Bank shows interest in rate hikes -

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ELEANOR HALL: The governor of the Reserve Bank has given another strong signal that official
interest rates could be moving higher sooner rather than later.

Speaking in Perth today Glenn Stevens warned that Australia's historically low interest rates
should not be kept too low for too long.

His comments drove the Australian dollar to a 14-month high on speculation that more rate rises are
not far away.

Business editor Peter Ryan has been listening to Mr Stevens' speech and he joins us now.

So Peter, did Glenn Stevens give any firm indication on when rates might move up again?

PETER RYAN: Well Eleanor there were no specific dates, as you'd expect, but the case for a rate
rise appears to be gaining ground.

There have been some very positive, very hawkish comments from the Reserve Bank governor. And he
says that if Australia has been through a type of recession, it has been, quote, a "very mild" one
and that the worst has probably passed.

Mr Stevens says a key step in the more optimistic outlook was taken last Tuesday when rates moved
up 25 basis points to 3.25 per cent. And this is the first time Mr Stevens has spoken since that

He told the audience the Reserve Bank is now in a recovery phase and that the process of
normalising interest rates in a sustainable fashion had begun.

GLENN STEVENS: The period of greatest weakness in the Australian economy has probably passed.
Barring another serious international setback the economy is likely to continue on a path of
gradual expansion in 2010.

That being so, those of us involved in monetary policy must turn our thoughts to encouraging the
sustainability of the expansion. That's particularly important for monetary policy given the lags
that are involved in it having its effect.

ELEANOR HALL: That's the governor of the Reserve Bank Glenn Stevens speaking in Perth this morning.

Now Peter in the lead up to the collapse of Lehman Brothers the Reserve Bank was criticised for
keeping interest rates too high. Is there any danger it could go too far in that direction now?

PETER RYAN: Well it seems from comments before this speech that the series of rate rises we can
expect will not be as dramatic and will take place over a longer period of time than we saw last
year in 2008. And Mr Stevens said today that policy needs to be recalibrated as conditions changed.

He also said the RBA has been paying very close attention to the spread of commercial lending
rates; in other words hikes over and above official increases by commercial banks and that maybe,
he didn't use these words but you could draw the conclusion that perhaps in future they would take
the view that independent hikes by the Reserve Bank could be doing the RBA's job in pushing rates

But on the matter of keeping rates too low for too long he did take a swipe at other central banks
around the world, such as the US Federal Reserve, though he didn't name that directly of course.

But the Reserve, Federal Reserve in the US has been criticised for keeping interest rates at a very
low point after the crash and also September 11. And those low rates have been widely
blamed as the seeds of the subprime mortgage crisis which took the world to the brink of financial
ruin last September. And Mr Stevens seems determined not to make the same mistake.

GLENN STEVENS: If we were prepared to cut rates very rapidly to a very low level in the face of a
threat but then we were too timid to start removing that stimulus when the threat had passed, well
we would end up with a bias, a serious bias in our policy framework. And bitter experience here and
elsewhere counsels against that approach.

The point is rather that the very low interest rate settings that we had were designed for an
economy which was weaker than the one we in fact are facing.

ELEANOR HALL: That's the governor of the Reserve Bank again, Glenn Stevens.

Well clearly interest rates are on the way up. What are economists saying about the way they're
reading this speech in terms of when the next rate rise will be and how big?

PETER RYAN: Well certainly currency markets are saying quite soon. The dollar shot up after Mr
Stevens' comments and is now hovering at 91.9 US cents.

JP Morgan which tipped last week's rate rise against consensus of other economists is now adding
two might more tightenings of 25 basis points each; one in November on Melbourne Cup Day and a
follow-up in December. They have put a year-end target of the official cash rate of 3.75 per cent.

But importantly what everyone's watching out for is the next official inflation reading. If that is
higher than expected there is a risk, according to JP Morgan, that the Reserve Bank might consider
a 50 basis point rise at its December meeting.

ELEANOR HALL: Business editor Peter Ryan, thank you.