Australian central bank raises benchmark rate to 3.25%; A$ soars

Tuesday 6th October 2009

The Reserve Bank of Australia raised its cash rate by 25 basis points to 3.25%, making it the first central bank apart from Israel’s to resume tightening monetary policy in the face of a resumption global growth.

“Economic conditions in Australia have been stronger than expected and measures of confidence have recovered,” Governor Glenn Stevens said in a statement posted on the RBA website. “It is now prudent to begin gradually lessening the stimulus provided by monetary policy.”

Australia skirted recession with a combination of interest rates at a 50-year low, government spending initiatives and demand for the nation’s raw materials in China, stoking speculation it was only a question of when the central bank would raise rates. Stevens said prospects for Australia’s Asian trading partners “appear to be noticeably better” than for most of the world’s biggest economies, where the legacy of the financial crisis would restrain growth.

Australia’s dollar jumped to 88.27 U.S. cents from 87.66 cents immediately before the announcement. The kiwi dollar tumbled to 83 Australian cents from 83.64 cents after the move, which extends the gap with New Zealand’s 2.5% official cash rate to 75 basis points.

"It's the first major developed central bank to hike rates," said Khoon Goh, markets economist at ANZ National Bank. "From a currency point of view, the rate differential should favour Australian dollar."

Stevens’ decision comes after signs that Australia’s economy is picking up pace. Job advertisements gained 4.4% last month while data has shown consumer spending has been fueled by government stimulus measures and the housing market has thawed.

Unemployment is currently 5.8% and tipped to have risen to 6% in September though Stevens said the jobless rate “has not risen as far as had been expected.”

Housing credit growth has been “solid” and house prices “have risen appreciably over the past six months,” he said.

Australian stocks pared earlier gains and government bonds weakened after the announcement.

Bets on a rate rise jumped after Australian Financial Review columnist Alan Mitchell, a clued-in RBA watcher, flagged the prospects in that newspaper. No change was expected, according to a Reuters survey of economists.

Since the start of the global financial crisis, central banks have slashed interest rates, with the Federal Reserve’s target now close to zero. Bank of Israel Governor Stanley Fischer raised Israel's key lending rate by a 25 basis points to 0.75% on August 24.

Businesswire.co.nz

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