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Strengthening economy pushes rates higher

by Staff Reporter9 minute read
The Adviser

The Reserve Bank of Australia has raised the official cash rate 25 basis points to 4.00 per cent – the first rate hike for 2010.

The Reserve Bank increased interest rates three times in quick succession in late 2009, prompting concerns that consumer demand would weaken, especially as fiscal stimulus was also being steadily withdrawn.

However, that concern was negated earlier this morning when the Australian Bureau of Statistics announced that retail sales had grown strongly in January.

According to the ABS, retail sales rose a higher-than-expected 1.2 per cent to a seasonally adjusted $20.14 billion in January from $19.91 billion in December, offsetting the 0.9 per cent fall in December.


Based on this positive data, the Reserve Bank decided to raise the official cash rate, marking the fourth rate rise in five RBA meetings.

Reserve Bank governor Glenn Stevens said the Australian economic conditions of late last year were stronger than expected, after a mild downturn a year ago.

“The rate of unemployment appears to have peaked at a much lower level than earlier expected. Labour 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,” Mr Stevens said.

“Investment in the resources sector is very strong. Credit for housing has been expanding at a solid pace, and dwelling prices have risen significantly over the past year. New loan approvals for housing have moderated a little over recent months, however, as interest rates have risen and the impact of large grants to first-home buyers has tailed off.”

"With the risk of serious economic contraction in Australia having passed, the Board moved late last year to lessen the degree of monetary stimulus that had been put in place when the outlook appeared to be much weaker. Lenders generally raised rates a little more than the cash rate and most loan rates rose by close to a percentage point. Nonetheless, interest rates to most borrowers remain lower than average."

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