The Australian economy is officially back on track with the Reserve Bank starting a series of rate rises this afternoon.
The RBA lifted its cash rate 0.25% to 3.25% and became the second major central bank after the Bank of Israel to end a campaign of emergency rate cuts to combat the impact of the credit crunch and the recession.
The Bank of Israel lifted its key rate in August by 0.25%, this today the RBA followed with the increase to apply from tomorrow.
A rebounding domestic economy, solid growth in China and the continuing international recovery, have convinced the RBA to end its campaign of rate cuts that saw a record 4.25% chopped from the cash rate in quick succession from September 2008 to last April.
“In late 2008 and early 2009, the cash rate was lowered quickly, to a very low level, in expectation of very weak economic conditions and a recognition that considerable downside risks existed,” The RBA Governor, Glenn Stevens said at the end of the post board meeting statement issued at 2.30 pm.
“That basis for such a low interest rate setting has now passed, however.
“With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy.
“This will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.”
So it’s a case of situation normal, the economy is back on its normal track and its back to worrying about inflation, while keeping a weather eye on demand, jobless numbers and the global economy.
“The global economy is resuming growth. With economic policy settings likely to remain expansionary for some time, the recovery will likely continue during 2010 and forecasts are being revised higher.
“The expansion is generally expected to be modest in the major countries, due to the continuing legacy of the financial crisis.
“Prospects for Australia’s Asian trading partners appear to be noticeably better. Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets. For Australia’s trading partner group, growth in 2010 is likely to be close to trend.
“Economic conditions in Australia have been stronger than expected and measures of confidence have recovered.
“Some spending has probably been brought forward by the various policy initiatives. As those effects diminish, these areas of demand may soften somewhat. Some types of capital spending are likely to be held back for a while by financing constraints, but it now appears that private investment will not be as weak as earlier expected.
“Medium-term prospects for investment appear, moreover, to be strengthening. Higher dwelling activity and public infrastructure spending is also starting to provide more support to spending.
“Overall, growth through 2010 looks likely to be close to trend.”
“Unemployment has not risen as far as had been expected. “
we were lucky that we had the ability to lower our cash rate to 3% in the first place.
The true skill test of our blue collar treasurer lays ahead. With the continuing positive economic news, will he be brave enough to consider reducing spending?
Let the series of — probably monthly — 25 basis point rises begin until the cash rate is around 5.5 or 6%. I could do with some decent interest on my deposits.
But what I would really like to see is a sustained recovery down at the ASX so that the value of superannuation funds rise again.
Meanwhile, true to the tired old script, let the Opposition bleat on at every opportunity, as oppositions do, about how the government causes each interest rate rise.
I guess a recovery at the ASX depends on whether you think pre GFC indicie levels were at fair value or not? whilst clearly not at the moment, there are many ‘experts’ who think that the ASX is not too far off fair value. Time will tell although there are some great stocks trading below fair value!
I agree with you on interest rates although the easiest way to the heads of aussie voters is via the exploitation of interest rate movements. I am looking forward to witnessing how the goverment handles various opinions al a Warwick McKibbin today.
I think a cash rate above 4.5% is achievable in the medium term.
Is it just me, or does the argument that rising interest rates are good because it means the economy is recovering seem more than a bit teleological. It seems to be that the RBA wanted to rein in lending, and that has nothing to do with the economy being good or bad. In fact, if people lent money for productive assets rather than endlessly bidding up the price of existing houses then lending should be a sign of investment and no-one would want to rein that in at the moment. So, really, we have a blunt policy response to a pathological flaw in the economy, not a rousing endorsement of its health. Yippee, let the good times roll.