Australian interest rates higher with more rises on horizon

Australia's central bank today raised interest rates to 4.25%, highlighting the country's escape from the world recession.

It is Australia's fifth rise in seven months as the mineral resources-rich country rides high on booming demand for iron ore, coal and other mined products from Asia.

In comparison, the Bank of England's rate setting committee will vote this week for another freeze at the historic low of 0.5%.

Economists in Australia predict there are more rises to come.

"The bottom line here is that as the economy normalises so will interest rates, so we'd still expect to see a cash rate of 5% by the end of the year," said Michael Blythe, chief economist at Commonwealth Bank.

Investors have priced in such an outcome, though they were less sure whether the central bank would move as early as its next policy meeting in May. Markets that predict future interest rates were showing a one-in-three chance of a rise to 4.5% next month.

"The board judges that with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today's decision is a further step in that process," the central bank said in a statement.

The Reserve Bank of Australia has indicated that average rates will fall somewhere in the range of 4.25% to 4.75%.

"They are sticking to the big picture that the global economy is improving and things here are picking up," said Paul Brennan, head of market economics at Citi.

The economy has been supported by aggressive fiscal and monetary stimulus, a stable banking system and strong demand for Australia's commodity exports from Asia, especially China.

"So, rates should be raised to normal levels quickly. We expect a rise to 5.25% by December," said Brennan.

That would take Australian rates even further above those in other developed nations, one reason the Australian dollar hit a record high on the euro today.