04/05/2010 - 12:45

Interest rate rises to 4.5%

04/05/2010 - 12:45

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The Reserve Bank of Australia has lifted the official cash rate by an expected 25 basis points to 4.5 per cent.

The Reserve Bank of Australia has today lifted the official cash rate by an expected 25 basis points to 4.5 per cent, the third rate hike in a row.

The decision follow's RBA's monthly board meeting today and is the sixth rate hike since October.

Reserve Bank governor Glenn Stevens said with the risk of a serious economic contraction in Australia having passed some time ago, the board had been adjusting the rate to a level consistent with average borrowing rates during the past decade or so.

"As a result of today's decision, rates for most borrowers will be around average levels ... a significant adjustment from the very expansionary settings reached a year ago," he said in a statement.

"The board will continue to assess prospects for demand and inflation, and set monetary policy as needed to achieve an average inflation rate of two-three per cent over time."

Homeowners with an average $300,000 mortgage will have to pay $48 more on their monthly repayment, assuming retail banks match the move.

The rate increase spells bad news for the Rudd government, coming on the day the latest Newspoll shows Labor slipping behind the coalition for the first time since 2006.

 

The RBA announcement is below:

 

At its meeting today, the Board decided to raise the cash rate by 25 basis points to 4.5 per cent, effective 5 May 2010.

Recently, forecasts for world GDP growth have been revised up again, and growth is expected to be at trend pace or a little above in 2010. Conditions in Europe remain quite weak, though recent data suggest growth is becoming more established in North America. In Asia, where financial sectors are not impaired, growth has continued to be strong, contributing to pressure on prices for raw materials. The authorities in several countries outside the major industrial economies have now started to reduce the degree of stimulus to their economies.

Global financial markets are functioning much better than they were a year ago, but sovereign risk concerns have escalated significantly in Europe over recent weeks. This has prompted additional efforts by policymakers to put fiscal policies onto a sounder footing and to provide support for Greece in the near term. To date, there has been very little contagion outside Europe.

Australia's terms of trade are rising by more than earlier expected, and this year will probably regain the peak seen in 2008. This will add to incomes and foster a build-up in investment in the resources sector. Under these conditions, output growth over the year ahead is likely to exceed that seen last year, even though the effects of earlier expansionary policy measures will be diminishing. The process of business sector deleveraging is moderating, with business credit stabilising and indications that lenders are starting to become more willing to lend to some borrowers, though credit conditions for some sectors remain difficult. Credit outstanding for housing has been expanding at a solid pace. New loan approvals for housing have moderated over recent months as interest rates have risen and the impact of large grants to first-home buyers has tailed off. Nonetheless, at this point the market for established dwellings is still characterised by considerable buoyancy, with prices continuing to increase over recent months.

Recent data on inflation confirm that it has declined from its peak in 2008, helped by 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. In both underlying and CPI terms, inflation over the most recent 12 months was around three per cent. 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.

With the risk of serious economic contraction in Australia having passed some time ago, the Board has been adjusting the cash rate towards levels that would be consistent with interest rates to borrowers being close to the average experience over the past decade or more. The Board expects that, as a result of today's decision, rates for most borrowers will be around average levels. This represents a significant adjustment from the very expansionary settings reached a year ago.

The Board will continue to assess prospects for demand and inflation, and set monetary policy as needed to achieve an average inflation rate of two to three per cent over time.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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