Australia's central bank tells borrowers to prepare for higher rates

[SYDNEY] Australia's top central banker on Friday cautioned borrowers it would be prudent to prepare for a rise in interest rates this year with inflation set to increase due to the recent surge in global commodity prices.

Speaking at a banking conference, Reserve Bank of Australia (RBA) Governor Philip Lowe noted core inflation in Australia was still modest at 2.6 per cent and wages were growing only gradually, which allowed time before a hike.

Asked if a rate rise could come as early as June, Lowe said he did not want to specify a month but there were plausible scenarios where it might be "earlier" and also scenarios where rates might not rise at all this year.

Financial markets are wagering heavily on a first rise in the 0.1 per cent cash rate by June, partly because the US Federal Reserve is widely expected to lift rates next week and several other major central banks have already tightened.

Lowe noted that as the RBA had not raised rates since late 2010, many borrowers in Australia had never seen a tightening cycle, which might prove to be an uncomfortable experience.

The decision on policy has been further complicated by the surprise resignation on Thursday of RBA Deputy Governor Guy Debelle after 25 years at the central bank.

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Debelle is taking a position in a green energy group founded by the country's richest man, billionaire miner Andrew Forrest.

He has been a key member of the nine-member RBA Board that sets policy and is well respected by markets.

Lowe said he was "as shocked as everyone else" by the decision, but it seemed Debelle felt he could help Australians by taking action on climate change through this new job.

It is now up to Treasurer Josh Frydenberg to pick a successor. Typically they come from within the RBA.

Asked about a possible replacement, Lowe said there was a deep team of qualified candidates within the central bank, but the Treasurer could choose an external candidate if desired.

An extra wrinkle is that a national election is due in May and once it is called, likely in April, the government goes into caretaker mode and would not be expected to make such an important appointment.

Lowe said he hoped a choice would be made before the caretaker provisions came into effect, but that was up to the Treasurer. REUTERS