Australia resumes rate-tightening policy

The Reserve Bank of Australia raised its cash rate target a quarter of a percentage point to 4.00% to keep a lid on an accelerating economy that the central bank said may have already recovered to its long-term average growth rate.

Resuming a policy tightening that it paused in February, the RBA indicated that it will continue to lead Group of 20 countries in removing stimulus from the economy, saying that the latest rate rise is just another step in a process of raising rates back to normal.

“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,” RBA Governor Glenn Stevens said in a statement.

As it did last month, the RBA mentioned heightened sovereign risks in the global economy. But it is more upbeat on the domestic economy, saying “economic conditions have been stronger than expected”.

“Labor market data and a range of business surveys suggest growth in the economy may have already been at or close to trend for a few months,” Mr. Stevens said.

Economists said further rate rises are on the way but the RBA won’t tighten policy every month. The intention is to return rates to normal levels, which is widely viewed as about 4.25% to 4.75%.

“They are not indicating any urgency,” said Bill Evans, chief economist at Westpac. “We think they will go again in a couple of months. It could be three months, it could be two, our formal view is two, that may depend on how the inflation numbers look.”

The Australian dollar was slightly lower after the statement. Tuesday afternoon in Sydney it was quoted at US$0.8979.

Major commercial banks said following the RBA move that their lending rates are again under review.

Treasurer Wayne Swan said in Canberra that banks won’t be justified if they continue the recent practice of raising lending rates by more than the RBA increase.

Australia & New Zealand Banking Group Ltd., National Australia Bank Ltd. and Westpac Banking Corp. said their lending rates are under review following the RBA move. A spokesman for Commonwealth Bank of Australia wasn’t immediately available.

Mr. Swan added that some areas of the economy remained weak, but mining is strong.

“If you are in resources, the outlook is quite bright, there’s no doubt the economy is strengthening, but if you saw some of the data that came out last week, parts of the economy are still soft,” he said.

The rate increase keeps the RBA well out in front of its G20 peers, most of which still have rates set close to zero and continue to face weak economies.

Having avoided recession in 2009, the RBA was the first central bank in the G20 to start raising interest rates, with an unprecedented string of rises in October, November and December. Mr. Stevens said last week rates are still 50 to 100 basis points, or hundredths of a percentage point, below normal.

Australia’s economy is starting a new upswing, with already-low unemployment creating concerns about the availability of workers as demand heats up in areas of the economy like mining and energy. Unemployment fell to 5.3% in January, not far above levels considered full employment for the economy. The RBA has warned that the resources boom will draw skilled labor away from other areas of the economy, sparking wage pressures.

“CPI inflation has risen somewhat recently as temporary factors that had been holding it to unusually low rates are now abating,” Mr. Stevens said Tuesday.

A rebound in construction and an investment splurge in the mining sector are expected to restore growth in the economy back to historic averages by the end of 2010. The RBA has indicated it expects inflation to remain within its 2%-3% target band, but has also said interest rates will need to rise further to achieve its forecast.

Data earlier Tuesday showed retail sales rebounding strongly, easing concerns that consumer demand had been flattened by rate increases in late 2009.

Retail sales rose a higher-than-expected 1.2% to a seasonally adjusted 20.14 billion Australian dollars (US$18.14 billion) in January from A$19.91 billion in December, the Australian Bureau of Statistics said. The rise more than offset a 0.9% fall in December.

Economists had expected a rise around 0.5%

The rebound in sales was supported by a 7.2% jump in department store sales in January, the ABS said. It was the largest rise in department store sales since March 2009, when the government was injecting cash payments directly into the pockets of consumers to offset the impact of the global financial crisis.

“Retailer discounting, cheaper import prices and festive cheer all influenced the January sales result and there are no guarantees that Aussie shoppers will spend up big in coming months,” said Craig James, chief equities economist at Commonwealth Securities.

Source: WSJ

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