RBA board member says rates to continue rising, Stern Hu trial closes in China: Economy Roundup

The Reserve Bank has issued a stark warning today that it will not wait for a global recovery before increasing interest rates.

RBA assistant governor Philip Lowe said in a speech today that he remains confident about Australia’s prospects, saying a rise in terms of trade is expected this year, with the RBA also expecting a higher value in the Australian dollar.

However, he said that rising housing prices could eventuate into a bubble, which would prove “unhelpful”. He said there are other challenges worldwide, including the need for Asian countries to increase domestic demand, and that the RBA cannot wait for these problems to fix themselves before raising rates.

“The alternative of waiting to see how the myriad of risks evolves before adjusting policy runs the significant downside of moving too late, particularly given that the economy is starting this upswing with less spare capacity than in previous upswings,” he said.

“Collectively, these outcomes provide us with some confidence that the economy is now in a reasonably solid upswing.”

And while he said the housing market has continued to stay positive, with auction clearance rates high and housing prices continuing to rise, there are some signs the market may be starting to slow. However, he said mortgage rates remain below normal levels.

“The important thing is the level of interest rates that borrowers face, not the cash rate. At the moment, the mortgage rate is still around 50 basis points below the average of the last decade and a half,” he said, also addressing the recent trend of tightened lending standards.

“This is good news, as it would obviously be unhelpful if a speculative cycle were to emerge on the back of the recent strength in housing prices,” he said. “This is an area that lenders and current and prospective home owners will need to watch carefully over the months ahead.”

Meanwhile, the trial of Stern Hu and three other Rio Tinto executives in China has ended, with the group facing potential jail terms after being accused of stealing commercial secrets.

It is understood a verdict may not be received for some time. The trial has strained relations with China and Australia, as Hu is an Australian citizen.

“It’s not just Australia that’s watching this trial very closely, but the eyes of the world are focused on the way in which this trial is conducted and what happens as a result of it,” Prime Minister Kevin Rudd told reporters in Perth today.

Shares lower after Portugal debt troubles

The Australian sharemarket has opened lower today after Portugal’s debt rating was downgraded and concerns remained overseas regarding a bailout plan in Greece.

The benchmark S&P/ASX200 index was down six points or 0.13% to 4885 at 12.10 AEST, while the Australian dollar opened about one cent lower to US90c.

ANZ shares lost 0.5% to $25.25, while Commonwealth Bank shares lost 0.5% to $56.95. Westpac lost 0.9% to $27.52, with NAB gaining 0.4% to $27.49.

Santos shares have managed to gain $4.45 to $15.01 this morning, with rumours of a potential takeover from Woodside Petroleum.

According to media reports, speculation has grown that Woodside may make a move on Santos in order to move into the coal seam gas market in Queensland.

Also in the mining sector, Chinese-owned China National Offshore Oil Corp has signed an agreement to buy liquefied natural gas from BG Group for 20 years.

While the deal was announced in May of last year, the two companies have said in a statement the project will allow for the supply of 3.6 million tonnes per annum of LNG from Curtis Island near Gladstone in Queensland.

“This contract is an unprecedented vote of confidence in Queensland’s new coal seam gas-based LNG industry,” resources minister Martin Ferguson said in a statement. “This deal makes Australia the world leader in the coal seam gas-based LNG industry and it brings us one important step closer to opening up a new LNG province on Australia’s east coast.”

“These agreements are a landmark development in the relationship between our two companies, building on what is already a close and productive partnership in deep water exploration, offshore China,” BG group chief executive, Frank Chapman

“CNOOC is a highly accomplished company and we look forward to working together as we bring this new ground-breaking LNG project to fruition.”

Washington H profit down 87%

Washington H Soul Pattinson and Company has recorded an 87% decline in first half profit due to a smaller contribution from coal miner New Hope.

The company said net profit dropped to $123.4 million, down from the $940 million recorded during the previous corresponding period. It announced an interim dividend of 14 cents.

“This decrease was mainly attributable to a reduced contribution from New Hope Corporation Limited as a result of lower international coal prices and the stronger Australian dollar,” Washington H said in a statement.

Overseas, Wall Street stocks closed lower due to a downgrade in Portugal’s credit rating, along with worries concerning the Greek economy. The Dow Jones industrial average fell 52.68 points, or 0.48%, to close at 10,836.15.