Australia lifts rates

October 6, 2009
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, SYDNEY, Oct 6 – Australia on Tuesday became the first advanced economy to raise interest rates since the global financial crisis and promised more rises to come, boldly declaring the risk of recession over.

The central bank announced a rise of 25 basis points to 3.25 percent, lifting rates off a 49-year low after an aggressive round of cuts credited with helping fight off the worst global downturn since the Great Depression.

"That basis for such a low interest rate setting has now passed, however," Reserve Bank of Australia (RBA) governor Glenn Stevens said in a statement.

"With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the Board\’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy."

Australia is the only major Western nation to avoid a recession in the worldwide slump and posted growth of 0.6 percent in the three months to June — the best in the developed world.

The RBA had slashed the rate from 7.25 percent last September to 3.0 percent in April, the lowest since 1960, while the government unveiled a massive 70 billion dollar (61.4 billion US) stimulus to keep the economy turning.

Treasurer Wayne Swan resisted calls to scale back the cash injection, despite loud protests from the opposition that it is no longer needed.

"To do so would rip the rug out from under the recovery and see more workers and more businesses hit the wall," Swan warned.

"It is the case that Australia\’s economy is out-performing other advanced economies," he added. "Many economists in particular will see today as a consequence of economic recovery."

However, some experts were stunned by the rate rise, saying they expected a more cautious approach during a fragile world recovery.

"It\’s come pretty quickly. It was a surprise as far as I was concerned," Nomura economist Stephen Roberts told Sky News.

"I was expecting them to wait a little bit longer. The reason they have given is that the danger of economic contraction has well and truly passed."

The Australian Chamber of Commerce and Industry (ACCI) said the RBA had acted "too hastily" and warned the move would dampen rising consumer and business confidence.
"We believe the Reserve Bank of Australia has actually pulled the interest rate trigger too quickly," ACCI economist Greg Evans told reporters.

"We believe on the back of continuing weakness in trading conditions and also a very uncertain outlook both domestically and internationally … the Reserve Bank has acted too hastily," he said.

Alan Oster, chief economist at National Australia Bank, said the rise was unlikely to be followed by other big economies until they have posted at least two quarters of growth.

"The next move for rates in other countries will be up, but I think most of them will start from the middle of next year," he said. "Most economies are not going to do it before Christmas, let\’s put it that way."

The Australian dollar surged to 88.8 US cents as investors rushed to cash in on the higher rate. Gains on the Sydney share index were limited to 0.4 percent over worries that the rise would hit mortgage-holders in the pocket.

The RBA said Australia\’s economy had been boosted by the growth of China, a key market for shipments of commodities like iron ore, but warned that demand could soften as stimulus starts to run dry.

"Economic conditions in Australia have been stronger than expected and measures of confidence have recovered," Stevens said.

"Some spending has probably been brought forward by the various policy initiatives. As those effects diminish, these areas of demand may soften somewhat."
 

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