No contagion here. The Australian central bank has just raised its cash rate 25bp to 4.25 per cent. The new rate is effective tomorrow.
The move underscores the diverging fates of Europe and the Asia-Pacific. The Reserve Bank of Australia acknowledges problems in Europe, but the governor comments: “To date, there has been very little contagion outside Europe.” He adds: “Australia’s terms of trade are rising by more than earlier expected, and this year will probably regain the peak seen in 2008.”
By Peter Smith, Sydney correspondent
Australia’s central bank underlined its determination to reduce monetary stimulus on Tuesday when it lifted its benchmark interest rate from 4 to 4.25 per cent, its fifth such rise since October.
The central bank of Australia has raised the cash rate from 3.75 to 4 per cent, as expected. A rate rise had been expected last month, but concerns for the global recovery and domestic credit caused a surprise stay of execution.
The increase is effective tomorrow. Normalisation is how the bank sees it. “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.”
Or, looked at another way, sterling has hit a 25-year low against the Australian dollar (and it’s 24.96 years, actually). Sterling has been falling across the board.
The change in exchange rate has been particularly swift of late, although there were steeper-still changes in the opposite direction during 1985.
Minutes of the February 2 rate-setting meeting show concerns for the global recovery and domestic credit were mostly behind the surprise decision to keep the cash rate on hold at 3.75 per cent.
Signs of growth in major economies “was currently being supported by the inventory cycle and stimulatory policy settings,” said the board of the Australian central bank. Positive signs for the US were drowned out by concerns for Europe, where household spending continued to fall, and debt levels were high. Plus, “as yet, there was limited evidence of a pick-up in investment in the euro area or Japan.”
The Reserve Bank of Australia navigated the slump by shadowing the steep rate cuts of the Federal Reserve; it is emerging tracking closely the tightening efforts of the People’s Bank of China. Rarely has that monetary co-dependence been stated as explicitly as it was on Tuesday, when governor Glenn Stevens explained the RBA’s first rate decision of the year. Chinese authorities’ efforts to “reduce the degree of stimulus to their economy” are one of the main reasons Australia can leave its target cash rate where it is, for now – but relying on China’s credit curbs to cool Australia’s economy is a high-risk strategy. (Summary from Lex)
The Australian central bank has kept its cash rate at 3.75 per cent, after three consecutive monthly rises, signalling concerns about the strength of the recovery. The Aussie dollar slid 1.4 per cent against both the dollar and the yen on the news.
The move was unexpected, though markets beat economists in being less surprised.
Rising inflation has made an rate rise even more likely at next week’s central bank meeting. Expectations are about 0.25 percentage point, which would take the cash rate to 4 per cent.
Australia’s consumer price index rose 0.5 per cent in Q4 from the previous quarter. While this was just half the Q3 rise of 1 per cent, it pushed the annual rate of inflation up to 2.1 per cent.
An imminent rise in the interest rate is unlikely. The Reserve Bank of Australia said it was in a suitably “flexible” position following three consecutive rate increases. Indeed, it transpires there was some debate over the last increase of 25bp. Minutes of the RBA meeting on December 2 noted: “The question … was whether it was more appropriate to take a further step at this meeting or to hold the cash rate steady pending a further evaluation of developments.”
Glenn Stevens said on Tuesday that the central bank will take rising Australian mortgage rates into account when it sets monetary policy. The governor of the Reserve Bank of Australia also said a “neutral” level for Australian interest rates may be lower than previously forecast with widening margins between benchmark and mortgage rates.