Australian Cash Rate Raised a Fifth Time

April 6, 2010

The Reserve Bank of Australia became the first central bank to lift interest rates five times since the world recession, engineering a 25-basis point increase for the the fifth time in the last six meetings and issuing a statement that called today’s decision one more step in a process of re-attaining normal rates insofar as no risk remains of a serious Australian economic contraction.  By normal, officials mean rates in line with their long-term average, which still lies above the new level.  Because several released data during the past month like retail sales did not measure up to expectations, a significant but minority share of analysts had thought the central bank would pause in its tightening this month, as it did in February.  Bank officials did not meet in January as per custom, so after implementing increases in October, November and December, they did not make a fourth move until March.  At 4.25%, the new Official Cash Rate (OCR) lies 300 basis points under its prior cyclical peak. From September 2008 to April 2009, the OCR was slashed in six increments from 7.25% to a 49-year low of 3.0%.

Today’s statement projects stronger Australian growth in 2010 than 2009 despite less macroeconomic stimulus.  CPI inflation is expected to stay in target, so the series of rate increases is not a response to above-target price pressure now.  Financial markets are observed to be getting stronger, and de-leveraging is moderating.  Unemployment peaked at a lower level than officials were assuming, and a recession was avoided, thanks in part to the resilient and early recovery of Asian market demand.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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