Australia's central bank chief has hinted interest rates could rise before an expected peak in unemployment next year, suggesting the federal government is more likely to face voters as home borrowing costs climb.
Reserve Bank of Australia (RBA) governor Glenn Stevens also said Australia's economic downturn would not turn out to be the most severe since World War II, signalling a belief that the worst of the global recession may be over.
Financial markets expect interest rates, at a half-century low of three per cent, to rise to four per cent by the second half of 2010.
Mr Stevens told a lunch in Sydney that the central bank would necessarily wait until unemployment peaked before moving on rates.
The RBA began cutting rates in September last year as the global financial crisis hit but is expected to reverse course in the second half of 2010 to head off inflationary pressures as the economy recovers.
The government expects unemployment to peak at 8.5 per cent in the second half of 2010, up from 5.8 per cent at present.
"I've never seen it written down or I have never heard in discussions ... some rule of thumb that we wait until unemployment has peaked before lifting rates," Mr Stevens told the Australian Business Economists luncheon on Tuesday.
The comments are significant in that they reveal a possible policy shift, as did Mr Stevens' comments at the same venue a year ago when he said rates would be cut before inflation moderated.
Two months later, the RBA began an aggressive series of rate cuts.
JP Morgan chief economist Stephen Walters said the comments were a sign interest rates would rise in 2010, even as unemployment rose, to prevent an inflation breakout in 2011 and 2012.
"Politically that's going to be quite tough for the government," Mr Walters told AAP on Tuesday.
"It will be a tough one to sell, but the (RBA) governor did not rule out that scenario."
The next federal election must be held by early 2011.
Mr Stevens also appears more upbeat than Prime Minister Kevin Rudd, who regularly asserts that Australia is exposed to the worst global uncertainty since The Great Depression.
"It appears at this stage ... that the downturn we are having may turn out not to be one of the more serious ones of the post-war era, in contrast to the experiences of so many other countries," Mr Stevens said.
The central bank boss signalled that the worst of the downturn for Australia could be over.
"It is becoming more common for Australians to see the glass as half full than as half empty," he said.
"Put another way, we can more easily imagine upside risks to the outlook, to balance the downside ones, than was the case six months ago."
In another sign the economy could be on the mend, a National Australia Bank survey, released on Tuesday, showed business confidence recovered in the June quarter to its best levels since the start of the global financial crisis in September 2008.
However, in a report released on Tuesday, leading economic forecaster Access Economics said it expected business investment to continue to fall over the next 12 months.
The report said private investment had fallen to a record low in the June quarter and was only propped up by state and federal stimulus programs.
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