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Rates May Keep Going Up Down Under


Business Outlook: AUSTRALIA

RATES MAY KEEP GOING UP DOWN UNDER

Higher interest rates are starting to take a bite out of Australia's rambunctious economy--but not enough to preclude more rate hikes.

The economy appears to have grown a robust 5.5% in 1994. Since mid-August, the Reserve Bank of Australia has lifted cash rates three times, totaling 23/4 points, to 7.5%, in an effort to forestall inflation. Analysts see booming growth subsiding by the second half of 1995, but only if the RBA boosts rates even more.

However, given that hints of slower growth are already cropping up, the timing of the next rate hike is a bit cloudier. The jobless rate edged up to 9% in January from 8.9% in December. Full-time job growth has slowed from its recent trend (chart), as have job ads. In December, retail sales fell for the second month in a row, and homebuilding permits dipped for the fourth month. A key leading indicator has been declining, and both consumer and business confidence are off their recent peaks.

But despite these signs of slowing, consumer spending and business investment outlays will continue to power the economy in the first half, raising the RBA's concern about faster wage growth. Average weekly wages in the quarter ended Nov. 30 rose 4.2% from a year ago. That was the fastest pace in nearly four years, and some of the larger wage negotiations were not settled until later.

Moreover, Treasurer Ralph Willis recently shook the financial markets when he announced there would be no midterm budget tightening, as the markets had expected. Willis also said the 1995 current account deficit will be some 45% greater than originally forecast. Indeed, the December gap widened 17%, to a record A$2.4 billion. The Australian dollar, currently at 74.7 U.S. cents, has been in a slide for two weeks.

But the government may be building support for an even bigger package of tax hikes and spending cuts in its May 9 budget. In the meantime, though, that leaves policy solely to the RBA, and that can only mean higher rates--perhaps soon.BY JAMES C. COOPER & KATHLEEN MADIGAN


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