Australia Raises Rates as Sign of Economic Improvement

Posted March 08, 2010

Australian bank raises interest rate. Economic improvement signals stronger outlook. Australian currency continues to improve.


On Tuesday, the Australian bank raised interest rates again, for the fourth time since October. The move was anticipated. The move shows that the central bank believes the country is rebounding even with international credit conditions being difficult and the concerns of debt levels in European countries continues to linger.

The currency markets on Tuesday, after the announcement seemed less impressed by the move, though. The Reserve Bank of Australia moved rates to 4.0 percent. As the announcement came through, there was sharp volatility that ended as an essentially flat outcome against the majors.

Part of the statement made by the Reserve Bank Governor Glenn Stevens stated that “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.” Some economists have predicted that this will be between five and six percent. The statement made by the Australian bank was another move to get the country back to a normal range, which signifies that rate increases are likely in the coming months.

However, the lack of immediate improvement in the currency markets after the announcement may be due to some expert believes that the central bank could overshoot the monetary tightening. Investors are concerned about the country’s mining sector which is one of the most important tools in the country’s economic growth. As countries like China move to slow the expansion of their mining industry to keep the country from pushing too far and overheating.

Economic Signs

Stevens points to strong economic factors as a main reason for the total one percent hike in rates since October. The conditions in the country, according to the Reserve Bank were better in 2009 than expected. The year prior, the downturn the country faced was mild. Stevens says, “Labor market data and a range of business surveys suggest growth in the economy may have already been at or close to trend for a few months.”

The Australian dollar fell to just below 90 US cents by the end of the day Tuesday. The Australian dollar has been aided by the interest rate increases and by the growth prospects. At this time in 2009, the Australian dollar was at only 63 US cents.

Debt Concerns

Last month, the Reserve Bank did not raise rates as was anticipated due to the global concerns about the potential default of Greece and similar countries over debt problems. At that time, the bank put off a decision to buy time to see how rate increases already in place affected the country.