September 21, 2017 / 7:08 AM / a year ago

UPDATE 1-Australia sees no "automatic implications" from global rate hikes

* Global rate increase have no automatic implications for Australia (Adds Australian dollar reaction, economist quote)

By Swati Pandey and Wayne Cole

SYDNEY, Sept 21 (Reuters) - Australia’s central bank does not have to follow a general move globally to raise interest rates, Governor Philip Lowe said on Thursday, as policymakers keep a watchful eye on the dangerously high levels of household debt.

Global rate rises would ultimately flow through to the country but the Reserve Bank of Australia (RBA) has the independence to decide on the timing of its move, Lowe said at a business event in Perth.

Central banks in most major economies have struck a hawkish tone recently. The Bank of Canada has already raised rates twice this year while the U.S. Federal Reserve has largely stuck with its tightening plans, with markets expecting the next one in December.

But Lowe signalled that domestic rates will not go up for some time as inflation was still below the RBA’s 2-3 percent target band and unlikely to hit the midpoint “anytime soon.”

“An increase in global interest rates would, over time, be expected to flow through to us, just as the lower interest rates have,” Lowe said.

“Our flexible exchange rate though gives us considerable independence regarding the timing as to when this might happen.”

The comments sent the Australian dollar slipping about 40 basis points to $0.7964, making it the worst performing major currency on the day.

The Aussie had raced to a 2-1/2 year peak of $0.8125 earlier this month and has stayed stubbornly high even in the face of policy tightening elsewhere.

“There was some speculation that Lowe may have used the speech to lay the ground work for future rate hikes. But, there was little in the way of hints about the future path of monetary policy,” said Kristina Clifton, economist at Commonwealth Bank.

“One exception was the comment that the winding back of monetary policy accommodation globally had no implications for us here in Australia... This may be a hint that Lowe is happy to lag the global policy normalisation cycle.”

A 25-basis-point increase in Australia’s cash rate to 1.75 percent is now almost fully priced in by June next year , while two major domestic banks recently changed their views to tip two hikes in the second half of 2018.

The RBA last raised rates by a quarter point in November 2010 to 4.75 percent. There then followed 12 successive easings, taking the cash rate to a record low of 1.50 percent.

Lowe said policymakers will be mindful of the fact that households are highly indebted and any increase in interest rates could hurt economy-wide spending.

Household debt, at a record high, has outpaced growth in incomes.

“Our concern has been that, in this environment, a small shock could turn into a more serious correction as households seek to repair their balance sheets.” (Reporting by Swati Pandey and Wayne Cole; Editing by Shri Navaratnam)

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