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Inflation lower as RBA increases interest rates

The Reserve Bank of Australia (RBA) will raise the official cash rate 25 basis points to 4.25 per cent, effective 7 April 2010, surprising the markets that had predicted the cash rate would remain unchanged.

Reserve Bank raises interest ratesIn a statement today Glenn Stevens, Governor of the RBA indicated that the central bank was concerned that strong international growth, particularly from Asian economies will place increased pressure on Australian inflation levels.

“The global economy is growing, and world GDP is expected to rise at close to trend pace in 2010 and 2011. In Asia, where financial sectors are not impaired, growth has continued to be quite strong, contributing to pressure on prices for raw materials.”

With the risk of serious economic contraction in Australia having passed some time ago, the Board has been lessening the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker.

Governor Stevens cited international efforts to wind back economic stimulus packages as evidence that the global situation is improving.

“The authorities in several countries outside the major industrial economies have now started to reduce the degree of stimulus to their economies.”

The RBA believes that global financial markets are now close to functioning properly, with credit conditions much improved from those seen at the height of the global financial crisis.

“Credit conditions remain difficult in some major countries as banks continue to face loan losses associated with the period of economic weakness. The concerns regarding some sovereigns appear to have been contained at this stage.” Governor Stevens said.

Conditions in Australia continue to grow in strength, with results exceeding those of last year, particularly as investment grows in the resources sector. Unemployment is no longer a concern and continued stimulatory monetary policy is not needed for the Australian economy.

“The rate of unemployment appears to have peaked at a much lower level than earlier expected. The process of business sector de-leveraging is moderating, with the pace of the decline in business credit lessening and indications that lenders are starting to become more willing to lend to some borrowers.” Governor Stevens said.

Housing is a mixed bag, with new loan approvals ‘moderating’ over recent months after successive interest rate increases from the RBA combined with the winding back of the first home buyers grant last year.

“Nonetheless, at this point the market for established dwellings is still characterised by considerable buoyancy, with prices continuing to increase in the early part of 2010.” Governor Stevens said.

“Inflation has, as expected, declined in underlying terms from its peak in 2008, helped by a noticeable slowing in private-sector labour costs during 2009, the rise in the exchange rate and the earlier period of slower growth in demand.” Governor Stevens said.

“Interest rates to most borrowers nonetheless have been somewhat lower than average. The Board judges that with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today’s decision is a further step in that process.”

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David Olsen

David Olsen

An undercover economist and a not so undercover geek. Politics, business and psychology nerd and anti-bandwagon jumper. Can be found on Twitter: <a href="http://www.twitter.com/DDsD">David Olsen - DDsD</a>

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