Interest rates may have to rise by two percentage points in Australia to cut the risk of overheating, the country's central bank chief has warned.

The warning affirms the position of the Australian economy as one of the world's strongest, with growth hitting 3.6% for 2001-02, a year during which many other leading industrialised nations entered recession.

Ian Macfarlane, governor of the Reserve Bank of Australia, told a parliamentary committee that there was a "high risk" of overheating unless tightening measures were introduced.

Analysis by financial experts of Mr Macfarlane's often convoluted statement inferred that interest rates needed to rise to 6.0-6.5%, compared with the current 4.5%.

'Sound' economy

Higher interest rates would help Australia come to terms with inflation which has risen to 3% as the country's boom has continued to defy the global economic slowdown.

House prices rose by nearly 50% in the six months to March 2002, the Housing Industry Association said.

Household debt rose 13% to a record level of 559bn Australian dollars ($303bn) in the final three months of last year.

The economy's robust performance represented "the first time in my experience" that Australia had defied a global recession, Mr Macfarlane said.

"It must give us confidence in the soundness of our economy," he added.

Investor reaction

The warning of sharply higher rates, which in many other countries would have caused a sharp correction in stock prices, was received calmly in Australian markets.

Australian stocks stood 0.7% lower in early afternoon on Friday.

Tony Pearson, head of market economics at National Australia Bank, described Mr Macfarlane's statement as "very aggressive".

But Mr Pearson added: "It's a good news story. The reason rates have to go so high is because the economy is doing so well.

"Domestic demand is very strong. The downside risk from offshore have all but disappeared."