Australia's Central Bank Lifts Key Interest Rate to Highest in 12 Years to Fight Inflation.
Australia's central bank on Tuesday raised its key interest rate to the highest level in 12 years to combat inflation. The Reserve Bank of Australia's move to lift the key rate by a quarter point to 7.25 percent bucks the trend among major central banks, which are either making or mulling rate cuts to try to stimulate their economies.
Australia's economy is booming, fueled by high global commodity prices and voracious demand from China, India and elsewhere for coal and other energy resources that Australia exports. The 17-year-old economic expansion has put capacity constraints at the top of the list of economic concerns, with inflation now creeping higher.
The central bank has clearly signaled its concerns about rising inflation and said it expects inflation to hit 4 percent on year in the first quarter, well above the bank's 2 percent-to-3 percent target band. In February, the RBA forecast inflation would remain above its target band until mid-2010.
The rate hike was the 12th straight increase since May 2002, and the first back-to-back monthly increase since the end of 2003. Governor Glenn Stevens said the Reserve Bank's board noted that inflation was high in 2007 and remained a threat for 2008 despite signs the world economy was slowing and recent turmoil in financial markets.
There was also signs that rate hikes were starting to bite. "There is tentative evidence that some moderation in household demand is beginning to occur, with business and consumer sentiment softer recently, and household credit demand slowing somewhat," Stevens said. "The extent of that moderation is uncertain, however."
Prime Minister Kevin Rudd said the rate hike came as a "double blow" for mortgage holders after last month's rise and renewed his vow to make fighting inflation one of his government's top priorities.
"Working families are recovering from the first rate rise, which occurred only a short time ago, and they've already tightened their belts," Rudd told reporters in Canberra. "A second rate hike will mean that the family budget will be even harder to balance."
Lehman Brothers chief economist Stephen Roberts said the statement indicated a recognition by the bank that its three interest rate hikes since last August were starting to have a cooling effect on the economy. "What that suggests to me is they recognize they've done a lot and they're moving towards monitoring the data as it comes to see whether any more is needed," Roberts said. "But there's certainly no urgent indication in here of another rate hike."
Lending some support to the bank's less hawkish assessment of demand pressures were January retail sales figures released Tuesday. The Australian Bureau of Statistics said January retail sales were steady at a seasonally adjusted 20.14 billion Australian dollars (US$18.8 billion; euro12.4 billion) compared to A$20.13 billion in December, and up from A$18.8 billion a year earlier.
Also, Australia's current account deficit widened to a seasonally adjusted A$19.35 billion (US$18 billion; euro11.8 billion) in the fourth quarter of 2007 from a A$16.35 billion deficit in the third quarter.
Australia's central bank on Tuesday raised its key interest rate to the highest level in 12 years to combat inflation. The Reserve Bank of Australia's move to lift the key rate by a quarter point to 7.25 percent bucks the trend among major central banks, which are either making or mulling rate cuts to try to stimulate their economies.
Australia's economy is booming, fueled by high global commodity prices and voracious demand from China, India and elsewhere for coal and other energy resources that Australia exports. The 17-year-old economic expansion has put capacity constraints at the top of the list of economic concerns, with inflation now creeping higher.
The central bank has clearly signaled its concerns about rising inflation and said it expects inflation to hit 4 percent on year in the first quarter, well above the bank's 2 percent-to-3 percent target band. In February, the RBA forecast inflation would remain above its target band until mid-2010.
The rate hike was the 12th straight increase since May 2002, and the first back-to-back monthly increase since the end of 2003. Governor Glenn Stevens said the Reserve Bank's board noted that inflation was high in 2007 and remained a threat for 2008 despite signs the world economy was slowing and recent turmoil in financial markets.
There was also signs that rate hikes were starting to bite. "There is tentative evidence that some moderation in household demand is beginning to occur, with business and consumer sentiment softer recently, and household credit demand slowing somewhat," Stevens said. "The extent of that moderation is uncertain, however."
Prime Minister Kevin Rudd said the rate hike came as a "double blow" for mortgage holders after last month's rise and renewed his vow to make fighting inflation one of his government's top priorities.
"Working families are recovering from the first rate rise, which occurred only a short time ago, and they've already tightened their belts," Rudd told reporters in Canberra. "A second rate hike will mean that the family budget will be even harder to balance."
Lehman Brothers chief economist Stephen Roberts said the statement indicated a recognition by the bank that its three interest rate hikes since last August were starting to have a cooling effect on the economy. "What that suggests to me is they recognize they've done a lot and they're moving towards monitoring the data as it comes to see whether any more is needed," Roberts said. "But there's certainly no urgent indication in here of another rate hike."
Lending some support to the bank's less hawkish assessment of demand pressures were January retail sales figures released Tuesday. The Australian Bureau of Statistics said January retail sales were steady at a seasonally adjusted 20.14 billion Australian dollars (US$18.8 billion; euro12.4 billion) compared to A$20.13 billion in December, and up from A$18.8 billion a year earlier.
Also, Australia's current account deficit widened to a seasonally adjusted A$19.35 billion (US$18 billion; euro11.8 billion) in the fourth quarter of 2007 from a A$16.35 billion deficit in the third quarter.
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