Australia yesterday lifted interest rates to 4 percent and warned they would continue higher as growth gets back on track and unemployment stabilizes after the financial crisis.
The central bank said rates would need to return to “average” levels after Australia escaped the global downturn without entering recession due to strong stimulus spending and huge Asian demand for its resources.
“The board judges that with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average,” Reserve Bank of Australia (RBA) Governor Glenn Stevens said in a statement. “Today’s decision is a further step in that process.”
Australia was the first developed economy to lift rates after the world’s biggest financial shock since the Great Depression, raising them 25 basis points to 3.25 percent in October and twice again before pausing last month.
The RBA is now unwinding its emergency cuts of late 2008 and last year, when interest rates were slashed by 425 basis points to a five-decade low of 3 percent as the world economy tanked.
“In Australia, economic conditions in 2009 were stronger than expected, after a mild downturn a year ago. The rate of unemployment appears to have peaked at a much lower level than earlier expected,” the bank said. “Credit for housing has been expanding at a solid pace, and dwelling prices have risen significantly over the past year.”
Australian Treasurer Wayne Swan acknowledged pain for home owners as mortgage payments rise, but said Australia’s economy, dubbed by analysts “the wonder from Down Under,” was “the envy of the world.”
“The Reserve Bank has flagged for some time that rates will rise as the economy recovers,” Swan told reporters. “The economy is recovering and rate rises are an inevitable consequence of a recovering economy that is outperforming the rest of the world.”
Analysts, who had been divided on whether the RBA would raise rates again, were expecting another three rises this year to ward off inflation as growth ticks upwards and unemployment drops further from the current 5.3 percent.
“They are not indicating any urgency,” Bill Evans, chief economist at Westpac Banking Corp, told Dow Jones Newswires. “We think they will go again in a couple of months. It could be three months, it could be two.”
Australia announced emergency stimulus worth more than A$70 billion (US$62.9 billion) last year including straight cash hand-outs and grants for first-home buyers as well as infrastructure spending.
Growth slowed to just 0.2 percent in the third quarter, down from 0.6 percent over the previous three months. Figures for the December quarter are to be revealed today.
RBA officials are confident that Australia is on the verge of a mining boom that will last years, if not decades, as Asian powers such as China and India expand and industrialize.
The Australian dollar, which has powered higher in recent months, was up slightly at US$0.8989 after the announcement, while the ASX/S&P200 share index closed 0.33 percent higher at 4,701.9 points.
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