Just after it was announced that retail sales were back on track in 2010, the Reserve Bank of Australia has thrown a spanner in the works by raising interest rates by a quarter of a per cent.
The RBA board has decided to raise the cash rate by 25 basis points to 4.0 per cent. RBA governor, Glenn Stevens, said that the decision was made because of Australia’s improved economic conditions.
“In Australia, economic conditions in 2009 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,” he said.
“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.”
Stevens said that inflation has also declined considerably.
“Inflation has, as expected, declined in underlying terms from its peak in 2008, helped by the fall in commodity prices at the end of 2008, a noticeable slowing in private-sector labour costs during 2009, the rise in the exchange rate and the earlier period of slower growth in demand,” he said.
Stevens was adamant that the interest rate are still much lower than average.
“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,” he said.
“Interest rates to most borrowers nonetheless remain lower than average. The Board judges that with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today’s decision is a further step in that process.”