Australia raises key interest rate to 4%

The Reserve Bank of Australia raised its key interest rate by a quarter point to 4%, saying the economy is returning to trend growth while inflation, which has picked up, will likely track within the bank’s target range this year.

Governor Glenn Stevens said Australia’s economy is improving against a backdrop of global gross domestic product that is expected to rise close to trend pace in 2010 and 2011, even while the expansion is “hesitant” in major economies. In Asia, the key market for Australia’s raw materials, “growth has continued to be quite strong,” he said.

In Australia, “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,” Stevens said. “Today’s decision is a further step in that process.”

The RBA last year became the first major central bank in the world to resume hiking interest rates after the global financial crisis. Australia’s economy skirted recession as demand for commodities from China continued almost unabated, providing a buffer to the global slowdown.

“We see nothing in this statement to change our view that the next move will be a 25 basis point increase in May, with a further 25bp move in the September quarter,” said Bill Evans, chief economist at Westpac Institutional Bank, in a note.

Evans says the “average” level for Australia’s cash rate is probably around 4.5%. “Risks to that outlook are to the upside, with the most threatening concern being an unexpectedly sharp further drop in the unemployment rate over the course of 2010,” he said. “Risks to the downside of our forecast centre around the global economy.”

The Australian dollar initially dropped to 89.67 U.S. cents after the statement from 89.96 cents immediately before. It recently traded at 89.88 cents.

Most economists expected a rate increase from the RBA today and had been surprised when it omitted raising rates last month. Recent upbeat data includes government figures today showing retail sales rose a greater-than-expected 1.2% in January from December.

The rate increase widens the gap with New Zealand’s central bank rate to 1.5 percentage points and pushes out the gap with the Federal Reserve’s target to at least 3.75 percentage points.

The kiwi dollar traded recently at 77.42 Australian cents from 77.54 cents before the statement.

Businesswire.co.nz

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