Australia’s Interest Rate Hike

November 2, 2010

The Policy Board of the Reserve Bank of Australia ended a six-month pause in its rate-rising campaign.  Only about a quarter of analysts anticipated today’s seventh hike of the Official Cash Rate to 4.75% from 4.50%.  A statement released today by the central bank calls today’s action “modest” and “prudent,” while also declaring that medium term inflation risks remain biased to the upside even at the new higher rate level and in spite of an appreciated currency.

As evidence for the above opinion, officials cite

  • Relatively modest amounts of spare capacity,
  • Australia’s highest terms of trade (export/import price ratio) since the early 1950s, which points to “stronger private spending over the next couple of years, especially in business investment.”
  • An acceleration in the growth rate of wages.
  • Temporary factors that have reduced inflation, like higher tobacco taxes and lower food prices, will be fading.

The six earlier rate increases were implemented in October, November and December of 2009 and March, April, and May of this one.  During the world recession, which Australia managed to avoid in part because of a rapid preemptive easing of both fiscal and monetary policy, the Official Cash Rate was sliced from 7.25% to 3.00%.  The 175 basis points of tightening over the past year reverses 41% of that earlier cumulative cuts in the central bank rate.

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

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