SYDNEY: Australia's central bank raised interest rates by a quarter percentage point on Wednesday, its first adjustment in 17 months, with a recovery in exports allowing policymakers to target a hot domestic economy.
The Reserve Bank of Australia (RBA) lifted the official cash rate to 5.00 % from 4.75 % after its board meeting on Tuesday, becoming the first major industrialised nation to raise rates in the current economic cycle. The Bank of England is expected to be the next in line.
“It is no longer prudent to continue with such an expansionary policy stance. The strength of demand for credit increases the danger associated with delaying a tightening of policy,” the Bank said in a statement on Wednesday.
The move increases the yield on the Australian dollar to a 400 basis point premium over the US dollar.
The currency surged nearly 1% against the greenback to trade at around US$0.7090 after the announcement.
“This is the beginning of a series of moves,” said SuLin Ong, senior economist at RBC Capital Markets.
“You couldn't rule out a December move. They would like to get to around five and a halfish (per cent) relatively soon,” she said.
A recovery in Australia's exports after severe drought, SARS and poor offshore demand finally gave the Reserve Bank licence to hike.
It was widely backed to be the first major central bank to start a global trend of higher interest rates as Australian property values and debt levels soar. – Reuters