Australia cbank sees gradual rate rise, good times

By Wayne Cole

SYDNEY (Reuters) - Australia's central bank said on Friday that interest rates would likely have to rise gradually as it sharply upgraded forecasts of economic growth for next year and pointed to a dwindling pool of spare capacity.

Market reaction was restrained, since the central bank left open the question of whether it would tighten in December or not. But for long-term investors, the Reserve Bank of Australia (RBA) laid out a tempting vista.

Its quarterly Statement on Monetary Policy essentially held out the prospect of an almost golden period of prosperity fuelled by rapid population growth, rising terms of trade and a boom in resource investment.

"The question of whether it might hike in December just completely misses the point," said Su-Lin Ong, a senior economist at RBC Capital Markets.

"The RBA here is foreshadowing years of expansion based on resources, population and Asian demand," she argued.

"It's big picture positive for Australia and the Australian dollar, and means rates are going nowhere but up. All we're doing is arguing about the timing."

Thus while interbank futures showed a roughly even chance of the RBA hiking to 3.75 percent in December, they were already fully priced for a tightening to 4.50 percent by June and at 5.0 percent or more by the end of 2010.

The central bank lifted its cash rate by 25 basis points to 3.5 percent this week, the second hike in as many months. That set it far apart from most other developed nations which still have rates at emergency lows.