Australia Raises Rates for Sixth Time Since October, May Pause

Tuesday, 04 May 2010 07:13 AM

Australia's central bank raised its key interest rate Tuesday for the sixth time since October, as the country's economy continues to improve amid soaring demand for its vast mineral resources.

The Reserve Bank of Australia's quarter percentage point rise took the benchmark rate to 4.5 percent, a move widely predicted by analysts.

"Australia's terms of trade are rising by more than earlier expected, and this year will probably regain the peak seen in 2008," central bank governor Glenn Stevens said in a statement explaining the rate decision. "This will add to incomes and foster a build-up in investment in the resources sector."

Burgeoning demand from China for Australia's iron ore and other mineral resources has helped the country weather the global economic crisis better than most developed nations. The economy was also bolstered by a 42 billion Australian dollar ($39 billion) stimulus package.

Property prices have soared in recent months. The Australian Bureau of Statistics on Monday released figures showing house prices rose 20 percent in the year to March, the largest annual increase since the bureau began collecting the data in 2002.

Inflation has also increased, and the bank noted in its statement that earlier inflation forecasts were too low. The bank's target range for inflation is two to three percent.

"In both underlying and CPI terms, inflation over the most recent 12 months was around 3 percent," Stevens said. "Nonetheless, the extent of decline from here may not be quite as much as earlier forecast and inflation now appears likely to be in the upper half of the target zone over the coming year."

The bank said that global financial markets are doing better than they were a year ago, and said the recent financial crisis in Greece was having little effect outside Europe.

If retail banks follow the central bank and pass the rise onto borrowers, it will add around AU$48 per month to repayments on a AU$300,000 mortgage.

"The Board expects that, as a result of today's decision, rates for most borrowers will be around average levels," Stevens said. "This represents a significant adjustment from the very expansionary settings reached a year ago. "

That statement indicates rate rises may be put on hold for a bit, said Commonwealth Bank economist Savanth Sebastian.

"That clearly highlights that they're very close to being comfortable with rates at the present time," said Sebastian, who predicts the bank will raise the rate to 5 percent by the end of the year.

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