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Australia's central bank raises key rate to 4.5%, widening gap with New Zealand

Tuesday 4th May 2010

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The Reserve Bank of Australia raised its benchmark interest rate by a quarter point to 4.5%, saying inflation will move into the top half of ithe average 2%-to-3% range it targets in the coming year.

The increase was anticipated by economists, according to a Reuters survey. Still, the Australian dollar weakened after Reserve Bank Governor Glenn Stevens said borrowing costs are now at about “average” levels, suggesting the RBA has less need for further increases in interest rates. 

The increase is the sixth in seven meetings for the RBA board, which has led the world in hiking interest rates in the wake of the global economic crisis. Australia skirted recession, helped by demand from China for minerals such as iron ore and coal and today Stevens said economic growth in Asia has continued to be strong, “contributing to pressure on prices for raw materials.”

The increase widens the gap with New Zealand’s 2.5% official cash rate to 2 percentage points, with Governor Alan Bollard saying he is likely to lift the OCR in coming months though not to the same extent as in previous tightening cycles. Australia is New Zealand’s biggest export market and source of tourists, and the strength of its economy helped soften the impact of the global economic slump.

Stevens said forecasts for world GDP have recently been revised up again, with growth expected to be at trend or above through 2010. While conditions in Europe remain “quite weak,” recent data in the U.S. suggest growth there is becoming more established, while Asian growth is “strong.”

While worries about Greece’s parlous fiscal state have reverberated in world markets, “to date there has been very little contagion outside Europe,” Stevens said.

The RBA predicts Australia’s output growth will exceed that in 2009, as the nation’s terms of traded improves more than expected, lifted incomes and investment in the resources sector.

The Australian dollar fell to 92.23 U.S. cents from 92.44 cents immediately before the RBA’s statement. The kiwi dollar traded at 78.88 Australian cents from 78.81 cents.

Australian inflation accelerated to 0.9% in the first quarter, from 0.5% three months earlier. Core inflation rose 3.1 percent from a year earlier.

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