Australia raises interest rate to 4.25%

Australia raises interest rate to 4.25%
By Peter Smith in Sydney
Copyright The Financial Times Limited 2010
Published: April 6 2010 06:55 | Last updated: April 6 2010 07:04
http://www.ft.com/cms/s/0/7bbe8aec-4136-11df-94c2-00144feabdc0.html


Australia’s central bank underlined its determination to reduce monetary stimulus on Tuesday when it lifted its benchmark interest rate from 4 to 4.25 per cent, its fifth such rise since October.

In an upbeat assessment of the country’s outlook, the Reserve Bank of Australia indicated growth this year would be around a trend of 3.25 to 3.5 per cent and inflation during the same period would be close to its 2 to 3 per cent target range.

”The board judges that, with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today’s decision is a further step in that process,” the central bank said in a statement.

It also pointed to a boost in the terms of trade following increases in iron ore and coal prices, the country’s two biggest exports, while concerns about “some sovereigns”, including Greece, “appear to have been contained at this stage”.

Wayne Swan, Australia’s treasurer, said the Australian economy was strengthening and that rates were still lower than before the global downturn.

”The fact is that rates went to 50-year lows during the global recession and, as the Reserve Bank governor is pointing out today, they are merely returning to more normal levels,” he said.

The Labor government will next month deliver its final budget before an election that is likely to be held later this year.

With economic management a main election battleground, Mr Swan indicated on Tuesday that the budget would be tight.

”We have a strict set of fiscal rules in our medium-term fiscal strategy and you’ll see that applied in the budget,” he said.

A number of economists and an industry group on Tuesday said they were surprised the RBA had raised rates again following the increase in March.

“Recent data on retail sales and building approvals have confirmed slowing trends,” said Bill Evans, chief economist at Westpac, the Sydney-based bank. “These sectors of the economy are the most interest rate-sensitive and indicate that rate hikes are starting to bite.”

But he added that rates could yet move to 4.5 per cent next month thanks to “very buoyant” commodity and house prices and strong employment numbers.

Heather Ridout, chief executive of Australian Industry Group, the business lobby group, said that at a time when there were questions about the strength of Australia’s recovery, the latest increase would be tough for business.

”Even if the banks don’t further widen their margins, borrowing rates for small business will remain around 3 to 4 per cent above normal,” she said.

Many economists expect Australia’s benchmark rate to reach 5 per cent by the end of 2010 and 5.5 per cent in the second half of 2011.