Australia increases interest rates

By Phil Boeyen, ShareChat Business News Editor

Wednesday 8th May 2002

Australia's Reserve Bank has finally lifted interest rates, increasing the cash rate by 25 basis points to 4.50%.

Australia has held off raising rates over the past couple of months despite two increases in the same period by its New Zealand counterpart.

The governor of the Reserve Bank of Australia, Ian MacFarlane, says that in recent months the economic climate has changed markedly, with firmer prospects now evident both in Australia and abroad.

"In the United States, the downturn that commenced early last year has proven to be milder, and of shorter duration, than had appeared likely a few months ago, and the US economy recorded strong growth in the March quarter.

"There has also been an upturn among Australia's main trading partners in the east Asian region (with the important exception of Japan) and more tentative signs of recovery in Europe.

Mr MacFarlane says the Australian economy is currently outperforming other advanced economies by a wide margin, recording growth of more than 4% last year when aggregate growth in the major economies was close to zero.

"Growth has continued and confidence strengthened in 2002 to date, and the economy appears well placed to continue its strong performance in the period ahead.

"Businesses are expanding their investment plans, and household spending has continued to grow strongly, supported by an upturn in employment and by rising wealth associated with increases in house prices."

The RBA says that Australia's 2.9% inflation rate remains close to the top of the target range although it seems to be flattening out, with prospects for a moderate decline in inflation in the next few quarters.

"Over a longer horizon, however, it is likely that inflationary pressures will continue, as surplus capacity in the economy is gradually used up. This is a contrast to what was expected when the bank reduced interest rates last year," says Mr MacFarlane.

"In reviewing all these factors the board's assessment was that the outlook no longer warranted a level of cash rates at the bottom of the range of recent experience.

"To persist with a strongly expansionary policy setting would risk amplifying inflation pressures and, over time, could fuel other imbalances such as the current overheating in the housing market, potentially jeopardising the economy's continued expansion."

The RBA's board says that an increase in the cash rate will reduce these risks and enhance the prospects for sustained growth consistent with the inflation target.

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