Australia's central bank raised interest rates by 25 basis points to 4.25 per cent yesterday, as part of a strategy to bring borrowing costs back to "average" levels.
The Reserve Bank of Australia (RBA) is forecasting economic growth at between 3.25 and 3.5 per cent in 2010, and inflation close to the 2 to 3 per cent target range. With the worst of the recession now over, the plan is to cut back on stimulus measures and return to fiscal and monetary normality, the bank said yesterday.
"With the risk of serious economic contraction in Australia having passed some time ago, the board has been lessening the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker," Glenn Stevens, the Governor of the RBA, said. "The RBA board judges that with growth likely to be around 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."
Australia was the first developed country to raise its interest rates in the aftermath of the financial crisis – taking rates from 3 to 3.25 per cent last October and raising them by 0.25 percentage points another four times since.
Opponents to the latest rise claim the rise could damage economic recovery, pointing to February's 1.4 per cent fall in retail trade and rising unemployment as evidence of the fragility of the improvements.
But Wayne Swan, Australia's Treasurer, said rates are still lower than before the crisis. "The fact is that rates went to 50-year lows during the recession and as the Governor is pointing out today... they are merely returning to more normal levels," he said.