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Thu, May 04, 2006 - Page 10 News List

Australia lifts key interest rate

BATTLING INFLATION The central bank's decision to hike the key interest rate to 5.75 percent was expected after a report that consumer inflation had hit 3 percent


Australia's central bank said yesterday it has lifted a key interest rate by a quarter point to 5.75 percent, the first increase in 14 months, to head off inflation. The move boosted the Australian dollar.

The Reserve Bank issued a statement saying its board had decided at its monthly meeting on Tuesday that it would lift the official cash rate to its highest since February 2001. It was the first hike since a quarter-point increase in March last year.

Speculation about a rate rise grew last week after government figures revealed that consumer price inflation had reached 3 percent -- the top of a 2-3 percent band in which the bank aims to keep inflation.

In a statement, Reserve Bank Governor Ian Macfarlane said the bank acted amid recent signs that inflation was accelerating. He said the underlying consumer price index in the first quarter had reached 2.75 percent, a rate it hadn't been expected to reach until the second half of the year.

"These domestic and international trends have added to inflationary pressures in an economy that has been operating for some time with rather limited spare capacity and low unemployment," Macfarlane said.

Traders bid up the Australian dollar, which climbed to US$0.7675 by early afternoon, up 0.7 percent from its close in New York of US$0.7620. Higher interest rates usually provide higher returns on fixed-income assets in that currency.

The Australian stock market ended the day flat, with the benchmark S&P/ASX 200 index rising just 0.4 points to close at 5,273.5.

Macfarlane's outlook on the economy was generally upbeat.

"In Australia, domestic spending has been growing at a solid pace recently and prevailing conditions suggest that this is likely to continue," he said. "High profitability and rising share prices are indicative of a favorable business environment in which investment growth is likely to remain strong."

Macfarlane also said that international developments were continuing to stimulate economic growth in Australia.

"The world economy is growing at an above-average pace for the fourth successive year and, significantly, forecasts have recently been revised upward," Macfarlane said.

"Commodity prices have been increasing strongly for some time, and they have risen further in the year to date," he added.

"This suggests a strengthening in the outlook for Australia's export earnings, with consequent expansionary effects on incomes and spending," he said.

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