Shock: RBA raises interest rates

Reserve Bank has lifts interest rates, signalling economy is rebounding from the global downturn

By Brad Gardner | October 6, 2009

The Reserve Bank has lifted interest rates, signalling Australia’s economy is rebounding from the global downturn.

Meeting today, the RBA lifted the rate by 25 basis points to 3.25 percent, claiming the "global economy is resuming growth".

Although saying the economy is still likely to be in recovery mode next year, the Reserve says forecasts have been revised higher on the back of an improvement in the prospects for Australia’s Asian trading partners.

"Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets," the Reserve Bank statement reads.

"For Australia’s trading partner group, growth in 2010 is likely to be close to trend."

The Reseve also cites growing confidence in Australia’s financial position and says the Rudd Government’s stimulus initiatives have helped.

However, the Reserve says other countries can expect a modest recovery next year due to the lingering effects of the financial fallout.

Furthermore, the statement says the growth in positive sentiment in global financial markets is being tempered by the poor state of balance sheets in some major countries.

In lifting the interest rate, the Reserve says capital spending is likely to be put off due to financing constraints.

Despite this, it says private investment will not be as weak as predicted, especially in the medium-term.

"Medium-term prospects for investment appear, moreover, to be strengthening," the RBA’s statement says.

However, the RBA says business borrowing has fallen as companies try and reduce debt levels and lending standards tighten.

It says large companies are better placed because they have access to equity capital, and adds that a lack of credit may soon be resolved as investors return and the share market recovers.

The Reserve says the unemployment rate has also remained steady in spite of earlier predictions, but the weak demand for labour the past year has led to a drop in labour costs.

Although it decided to lift rates this month, the RBA says inflation is not increasing rapidly.

"Underlying inflation should continue to moderate in the near term, but now will probably not fall as far as earlier thought," the RBA says.

The RBA has also hinted it may raise rates again when it meets in November.

In its statement, the Reserve says the cash rate was slashed to 3 percent because of the impact of the global economic downturn.

"That basis for such a low interest rate setting has now passed, however," the RBA statement reads.

It says it is "now prudent" to reduce the effect of the Government’s stimulus payments because the economy is expected to grow close to trend during the next year.

"This will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead," the Reserve says.

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