Australia unexpectedly raises rates

By Peter Smith, FT.com

(FT) -- Australia's central bank has defied market predictions by lifting its official interest rate by 25 basis points to 4.75 per cent as it attempts to damp inflationary pressures as the country's economic recovery gathers pace.

The surprise move on Tuesday lifted the Australian dollar by as much as 1.1 per cent to US$0.9993.

Lifting rates for the first time since May, the Reserve Bank of Australia warned the country's economy was "subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity".

Seventeen out of 24 economists surveyed by Bloomberg had expected rates to be held steady although many had predicted an increase before the year end.

The central bank has now raised rates seven times since October last year when they hit a 49-year low of 3 per cent. Australia stood alone among the developed world by narrowly avoiding technical recession during the global financial crisis and its central bank was the first among the Group of 20 nations to begin raising rates in the aftermath of the downturn.

Canada, Norway, New Zealand and other nations have since tightened monetary policy, although not as aggressively as Australia which is enjoying boom conditions in its mining industry.

Glenn Stevens, RBA governor, said concerns about a larger than expected slowdown in China, Australia's top trading partner, had lessened, while most commodity prices had firmed.

"The [commodity] prices most important to Australia remain at very high levels, with the result that the terms of trade are at their highest since the early 1950s," Mr Stevens said. Australia's biggest exports are coal and iron ore.

"While there has been a degree of caution in private spending behaviour thus far, the rise in the terms of trade, which is now boosting national income very substantially, is likely to lead to stronger private spending over the next couple of years, especially in business investment," he said.

Annette Beacher, senior strategist at TD Securities, said the deteriorating outlook for inflation in Australia had driven the latest rate hike and the central bank had now made "the official jump into restrictive monetary policy".

She predicted that the central bank will raise rates to 5.75 per cent "over the next year".