Why Australia increases interest rate continuously

08:36, May 05, 2010      

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The Reserve Bank of Australia (RBA) lifted the cash interest rate by 25 basis points to 4.5 percent on Tuesday, the sixth interest rate rise in eight months, as the domestic economy remained one of the best performing in the world.

Glenn Stevens, Governor of the RBA, said while announcing the decision that several reasons were behind the banks decision to raise the cash interest.

First of all, the recent forecasts for world GDP growth had been revised up again, and growth was expected to be at trend pace or a little above in 2010, he explained. In Asia, where financial sectors were not impaired, growth has continued to be strong, contributing to pressure on prices for raw materials. Though conditions in Europe remain quite weak, recent data suggest growth is becoming more established in North America.

On the other hand, "global financial markets are functioning much better than they were a year ago," he said.

Local economic analysts attribute the rise of interest rates to the combination of the strong recovery in the resources sector, growing demand for resources from China and other Asian buyers, higher inflation and expensive housing prices.

All this means a rate rise looks certain to occur, said Stephen So, head of Investment, Australia, KVB Kunlun.

The hike of the rate is aimed at pressing the inflation and the rising price of housing market, So added.

Australian Bureau of Statistics said on Monday that the real property market witnessed a 20 percent rise in the year to March, the largest recorded rise since the series started eight years ago. The monthly increase follows a 2.5 percent inflation rise in the year to March and the 2.8 percent CPI rise from the official figures for the March quarter, both higher than the government expected earlier.

However, So believed the increasing interest rate would slow down the Australian economy and put pressure on small business.

The United Retail Federation (URF) said times were tough for the sector, which was still emerging from the economic downturn driven by the global financial crisis.

"Clearly, the RBA have their heads buried in economic textbooks and are totally unaware of how tough a time it is at the moment for small business and the retail sector," URF national president Scott Driscoll said in a statement.

The opposition party also criticized the government for the interest rate increase. Shadow Treasurer Joe Hockey said the interest rate rise was another example of Prime Minister Kevin Rudd not delivering on his promise to keep living costs down.

Rudd has reneged on a promise to improve the standard of living for Australians, and for everyday Australians, "suddenly life has become more expensive," he told journalists in Sydney on Tuesday.



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