Australia's central bank lifted interest rates in a surprise move on Tuesday, ending a six-month freeze, as it warned the economy faced a "large expansionary shock" triggered by the mining boom. The Reserve Bank of Australia (RBA) defied widespread expectations it would leave borrowing costs on hold by boosting the official cash rate by 25 basis points to 4.75 percent.
The move sent the local dollar soaring to near-parity with the greenback. "At today's meeting, the board concluded that the balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent," bank Governor Glenn Stevens said in a statement. Most economists had expected rates in resource-rich Australia, the only major Western country to avoid recession during the financial crisis, to stay on hold for a sixth consecutive month following recent benign inflation data.
Figures last week showed annual inflation was running at a lower-than-expected 2.8 percent - with underlying inflation up 2.4 percent for the year, squarely within the RBA's 2.0 to 3.0 percent comfort zone. But Stevens said despite evidence that prices were moderating, there were still concerns that inflation would rise again.
"The economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity," he said. "Looking ahead, notwithstanding recent good results on inflation, the risk of inflation rising again over the medium term remains."
The Australian dollar, which benefits from higher interest rates as those of the United States and Europe sit at historic lows, surged on the announcement, rising to 99.80 US cents. The stock market also closed higher with the benchmark S&P/ASX200 adding 2.9 points, or 0.06 percent, to 4,701.4.
Australia led the Western world in lifting rates following the global financial crisis, raising them off 49-year lows with six rapid hikes between October 2009 and May. The RBA is now among several central banks in Asia Pacific to move recently, following China's decision late last month to make its first interest rate rise in three years and Singapore's tightening of monetary policy.
India's central bank also raised benchmark interest rates by a quarter percentage point Tuesday - its sixth hike since the start of the year to curb stubborn inflation in the country's booming economy. The Australian economy is riding a once-in-a-century mining and resources boom driven by enormous demand for raw materials such as iron ore and coal from Asia, including rapidly industrialising China. CommSec equities economist Savanth Sebastian said the RBA was showing optimism about the economy, and "trying to be ahead of the game" as wages are set to pick up and unemployment remains at a low 5.1 percent.
"It's not an economy that's overheating, but it's an economy on the cusp of a very strong recovery," Sebastian told AFP. "And the Reserve Bank, just being prudent, is trying to position themselves in a way that they don't have to hurt households to a greater degree next year."
Stephen Roberts, chief economist for Nomura in Sydney, agreed the hike was a pre-emptive move, adding that he expected a further rate rise in December. "It's the expansionary shock from terms of trade and the chance inflation will rise over next year that they are battling," he said. The Australian Chamber of Commerce and Industry said the rate rise was disappointing, particularly as retailers geared up for Christmas sales.
Comments
Comments are closed.