Australia raised interest rates for an unprecedented third month running yesterday, announcing a 25 basis-point rise to 3.75 percent as it makes a “gradual recovery” from the financial crisis.
Reserve Bank of Australia Governor Glenn Stevens said the risk of serious contraction in Australia had passed and the worst had failed to materialize, but remained cautious on economic conditions.
“In Australia, the downturn was relatively mild, and measures of confidence and business conditions suggest that the economy is in a gradual recovery,” Stevens said.
It was the third successive rise since Australia in October became the first advanced economy to raise rates after the global financial meltdown. Australia was also the only major Western nation to avoid a recession in the slump.
Stevens said the effects of government stimulus worth more than US$70 billion were beginning to fade, but public infrastructure spending was stoking demand and prospects were strengthening for business investment.
“The rate of unemployment is now likely to peak at a considerably lower level than earlier expected,” he said, adding there had been a “noticeable recovery” in household wealth.
Treasurer Wayne Swan said it was “unsurprising” that the bank had again lifted rates, which “could not stay at 50 year emergency lows forever”.
“The Australian economy is performing better than just about every other advanced economy, with lower debt, lower deficit and lower unemployment,” Swan said. “The consequence of that is rates will rise gradually over time.”
Canberra last month sharply lifted its economic forecasts for this financial year, flagging growth of 1.5 percent instead of a 0.5 percent contraction and indicating that unemployment will peak at a relatively modest 6.75 percent
Most analysts had expected yesterday’s rate hike, with CommSec’s Craig James saying aggressive cuts from 7.25 percent in September had left the cash rate “way too low.”
“Now it’s getting back to more normal levels,” James told Sky News. “This will incur a degree of pain for households ... [but] this is actually great news for savers in the economy. We’re seeing interest rates going up and that’s going to provide income for them in the coming months.”
The bank next meets to consider rates in February, and most analysts believe the cash rate will approach between 4.5 and 5 percent in the medium term.
Investors took heart from Stevens’ remarks, with the stock market closing up 0.38 percent at 4,719 in the wake of the announcement, after an otherwise flat day.
The Australian dollar took a battering from the hike, closing at US$0.9133, down from US$0.9171 before the decision and US$0.9153 on Monday afternoon.
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