Homeowners should brace for further interest rate rises this year, although the degree of official changes will be subject to how retail banks react, the Reserve Bank of Australia governor Glenn Stevens says.
Facing his six-monthly questioning from the federal House of Representatives economic committee in Canberra on Friday, Mr Stevens reiterated that if economic conditions evolve as the central bank expects, further adjustments to monetary policy will probably be needed.
"This is a normal experience in an economic expansion: as economic activity normalises interest rates do the same," he said.
"Though, of course, it is the interest rates borrowers actually pay, and that savers receive, that are important rather than the cash rate per se.
"The board sets the cash rate with that in mind."
The central bank raised the official cash rate three times in as many months late last year, although unexpectedly left it unchanged at its first board meeting of the year earlier this month.
He noted that most lenders raised borrowing rates by a little more than the cash rate.
But, he said, even allowing for these margin changes, borrowing rates were still below average.
He said the economy was well positioned to prosper due to its proximity to a strong Asian region, as it sets course on a new upswing in growth.
"We expect that it will grow by a bit over three per cent for 2010 and about three per cent in 2011 and 2012."
The economy expanded by 0.2 per cent in the September quarter for an annual rate of 0.5 per cent in the year.
But he took issue with a claim by opposition frontbencher Barnaby Joyce that Australia risked defaulting on its borrowings if government debt kept rising.
"There has never been an event of sovereign default by Australia," Mr Stevens said.
"I very much doubt there ever will be."
Earlier in February, Senator Joyce raised concerns over Australia's debt levels, saying the country was going into "hock to our eyeballs" to overseas investors.
"We are getting to a point where we can't repay it," Senator Joyce.
Mr Stevens also said that a speech he gave for the 50th anniversary of the RBA was not meant as a commentary on current Australian fiscal policy.
He said the point he was making was that globally, governments had made more active use of fiscal policy recently than they had for a long time, Australia included.
"That is understandable and makes sense in the circumstances that we faced," he said.
But it raised issues of how fiscal policy around the world would be conducted in the future and the timing of debt consolidation.
"This is a very important question, less for us than for Europe or the UK or the US," Mr Stevens said, adding some countries had budget deficits of 10 or 13 per cent of gross domestic product and debt ratios of 80, 90, 100 per cent or more.
Mr Stevens, agreed under questioning, that there was a link between excessive government spending and interest rates.
"That link is always there."
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