India central bank raises rates, Australia poised for more

MUMBAI/SYDNEY: India raised interest rates for the second straight month on Tuesday (April 20) and Australia signalled it may tighten policy further as the region's economies rapidly recover, putting pressure on policymakers to keep inflation in check.

Central banks in much of the region have been leading the world in unwinding emergency stimulus put in place during the global financial crisis, unlike their counterparts in the West, which are seeing far slower and more uneven economic recoveries.

India and Australia are the only two Group of 20 economies to have raised rates so far.

But weaker-than-expected inflation in the first quarter in New Zealand prompted investors to pare back expectations of a rate increase to July from June, pushing the kiwi dollar down sharply.

The Reserve Bank of India raised its key policy rates by 25 basis points each, as expected, and also lifted its cash reserve ratio requirement for banks by quarter of a percentage point to drain more liquidity from the financial system as it battles inflation near double digits.

"With the recovery now firmly in place, we need to move in a calibrated manner in the direction of normalising our policy instruments," RBI Governor Duvvuri Subbarao said in a policy statement, after it raised its key short-term borrowing rate, or reverse repo, to 3.75%.

Asia's third-largest economy is set to grow by 8.5% in the current financial year and 9% the next, and inflation is spreading beyond food to fuel and manufactured goods such as cars. Annual inflation reached 9.9% in March, it fastest pace in 17 months.

Analysts expect the RBI to continue increasing interest rates throughout the year to bring them back towards pre-crisis levels.

Only China is growing faster among the world's major economies. Its central bank has already moved to drain further cash from the banking system and clamp down on lending, and analyst expect it to start raising rates this quarter.

By contrast, a much slower recovery in the US and Europe means interest rates there will likely remain on hold for some time yet.

Elsewhere, Sweden's central bank is expected to hold rates steady at 0.25% when it announces its policy statement 0730 GMT, with the first rate rise expected only in July, according to a Reuters poll.

The Bank of Canada is also seen keeping rates steady later in the day, though it is widely expected to send a message to markets about future rate hikes.

The US Federal Reserve will next meet on April 27 and 28 and the European Central Bank on May 6.

A recent Reuters poll showed big banks which deal directly with the Fed saw only a 62% chance of it raising rates before the end of this year.

In Australia, minutes from the central bank's rate meeting earlier this month showed policymakers felt a boom in export earnings meant it could not delay a further hike in rates, leading investors to wager on another rise by June at the latest. The Reserve Bank of Australia (RBA) felt a hike to 4.25%, its fifth in six policy meetings, was needed because surging prices for iron ore and coal exports would boost the economy more than expected just a few months ago.

The Australian dollar rose to US$0.9275 after the minutes, from US$0.9256 before. Implied rates showed the chance of a move in May edged up to 28%, from 25%, while interbank futures implied a 64% of a hike in June.

"A swift move to get back to normal levels seems almost certain," said Bill Evans, the chief economist at Westpac.

"We think that the next move will be in either May or June, and on balance, the very clear emphasis on the resources boom tips the scales towards May."

The minutes showed the RBA thought at the April meeting that rates were "a little below average", and that the April move was a step in the process of returning them to "normal" levels -- or between 4.5% and 5% according to many private-sector economists. -- Reuters