RBA leaves room for more rate rises in 2010: Economy Roundup

The Reserve Bank of Australia raised the official interest rate by 25 basis points to 3.75% in order to better reflect overall economic health, the minutes of its December meeting revealed today.

The RBA said a variety of economic data revealed both the international and domestic economics were recovering, including GDP growth outside the G7, increases in commodity prices and higher demand for resources exports.

“Developments in the United States continued to suggest a gradual improvement in conditions. Although household spending in the September quarter had been boosted by the incentives for car purchases, other components of consumption had also shown modest growth, and the contraction in business investment had slowed.”

“In the euro area, positive growth had been recorded in the September quarter, with Germany, France and Italy all recording growth but the Spanish economy continuing to contract.”

Domestically, the RBA found that data already released suggested a rise in GDP for the quarter. Board members said the direction of the movement in business conditions surveys gave good indicators of increased activity.

“Information on the labour market had also mostly been positive. Employment was estimated to have increased in October, and the unemployment rate had remained around 5.75% for more than half a year.”

As a result, the board decided the cash rate set with the outlook appeared too low for an expanding economy, and that if the economy continues to recover then the official interest rate will need to rise in order to lessen the amount of effect a stimulatory cash rate has on the economy.

“Members saw the arguments as finely balanced, but concluded that the stance of monetary policy would best reflect the circumstances facing the economy over the period ahead if there were an increase in the cash rate of 25 basis points at this meeting.”

The RBA board also said it had more flexibility to raise rates in the future.

Dubai given debt lifeline

Overseas, investors have gained their confidence back after Abu Dhabi gave neighbour state Dubai a $US10 billion lifeline in order to hold off a default on its bonds.

The move allows state-owned company Dubai World to pay a $US4.1 billion bond its property developer unit Nakheel was due. The cost of insuring Dubai’s debt fell after the news broke, with the local stock market rising 10.4% – the largest one-day gain in 14 months.

The lifeline was a surprise move, after Abu Dhabi gave no indication it would hand over any financial assistance for the state’s troubles. Additionally, many investors have remained cautious to the undisclosed terms of the deal.

The Australian sharemarket has opened higher today after the events in the Middle East, with investors now able to view Dubai as a financial haven once again.

The benchmark S&P/ASX200 index was up 35 points or 0.76% to 4689.6 at 12.10 AEST, while the Australian dollar also rose slightly to US91c.

ANZ shares rose 1.4% to $21.45, while Commonwealth Bank shares gained 0.5% to $53.09. Westpac gained 0.6% to $23.86, as AMP also rose 0.2% to $6.24.

Meanwhile, the number of new housing stats has fallen a seasonally adjusted 6% to 34,082 in the September quarter, according to the latest figures from the Australian Bureau of Statistics.

The figures also show the number of commencements for private sector houses grew by 3.4% to 24,570, while the number of commencements for other residential buildings fell a massive 32.5% to 7,699.

In the mining sector, Amcor has received clearance from the European Commission to purchase Rio Tinto’s Alcan packaging arm in a $US2 billion deal, following an agreement to sell off a packaging operation in Spain.

“Receiving approval from the European Commission is an important step toward closing the Alcan Packaging acquisition,” chief executive Ken MacKenzie.

“The two plants to be divested represent less than 5% of the combined sales in Europe and will not have a material effect on the synergies or operational improvements anticipated.”

Rio Tinto under pressure for new union agreement

However, Rio Tinto has now come under pressure for a new union agreement from a group of employees working on its Pilbara iron ore mines, the Australian Financial Review has reported.

The Construction, Forestry, Mining and Energy Union has lodged an application with Fair Work Australia to see whether there is a majority support for the new collective agreement.

Fund manager Perpetual has purchased advisory firm Fordham for $35 million, the company has announced. Chief executive David Deverall said in a statement the acquisition will help fill the company’s gap in providing high net-worth advice.

“Fordham represents an attractive opportunity to extend Perpetual’s services to private business owners,” Deverall said.

“This enhances our ability to better service an important market segment for the company and helps us reach our goal of becoming the leading adviser to financially successful Australians and their families.”

Overseas, US stocks rose after investors gained their confidence due to Dubai’s debt lifeline and Citigroup’s plan to repay the Government about $US20 billion in bailout funds.

The Dow Jones Industrial Average gained 29.55 points or 0.28% to 10,501.5.