(RTTNews) - Strengthening the view that the Australian economy is improving steadily, the central bank raised its interest rate for the second straight session, after keeping it unchanged at record low levels for five consecutive months. In October, Australia became the first G-20 member nation to hike its benchmark interest rate since the onset of the financial crisis in late 2008, indicating that a global recovery is underway.

Tuesday, the Reserve Bank of Australia raised the cash rate, its key interest rate, by a further 25 basis points to 3.5%, as economic conditions were stronger than expected and confidence had recovered. “With the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker”, the central bank chief Glenn Stevens said in a statement.

The central bank said the rate hikes in October and November meetings would help in increasing the sustainability of the growth in economic activity and keeping the inflation with target levels over the coming years. The bank expects inflation to moderate in the near term, but slower than expected earlier. However, the headline inflation is expected to rise somewhat over the year. But, both the underlying and headline inflation are expected to be consistent with the target levels in 2010.

Spending in the economy rose as a result of the various policy initiatives, with higher dwelling activity and public infrastructure spending also providing support. However,with the effects of the stimulus tapering, the central bank expects demand to soften a bit.

In the Mid-Year Economic and Fiscal Outlook released on Monday, the Treasury noted that it was appropriate to withdraw the stimulus only gradually, giving time for the private sector to recover. The government said the planned withdrawl would start detracting from the GDP in the March quarter of 2010, in turn causing real spending to fall in fiscal year 2010, for the first time in 20 years.

Private investments would not be as weak as expected, but capital spending could be held back by financing constraints, the RBA said. However, the medium term prospects for investments appear to be strengthening, the bank said. This was also reflected in housing credit, which showed solid growth and dwelling prices that increased in the year. Moreover, the central bank said there were signs of improvement in labor market conditions, with the rate of unemployment likely to peak at at a considerably lower level than earlier expected.

The RBA pointed out that with global economy having resumed growth, and policy settings likely to remain expansionary for some time, the recovery is likely to continue into 2010, with the forecasts being revised higher. The government on Monday raised the growth outlook for 2009 and 2010, expecting the economy to grow 1.5% this year, reversing the forecast of a 0.5% contraction in May. For 2010, it raised the growth to 2.75% from 2.25%. Moreover, it forecasts lower unemployment and deficits. The government said the jobless rate could now peak at 6.75% in 2010, lower than a 8.5% predicted in May.

Meanwhile, the interest rate hike has been received with mixed reactions. Economists at Westpac said the hike in interest rate was broadly in line with expectations. They are expecting a further 25 basis points increase in December.

Harley Dale, chief economist at the Housing Industry Association however, painted a bleaker picture by saying the interest rate hike would do nothing to boost the supply of housing, which is essential to moderate house prices and rent pressures. “After today’s increase, it would be prudent for the RBA to sit on its hands and assess economic developments domestically and globally,” Dale said. The HIA noted that the impact of the rising interest rates would not fall evenly on the different sectors of the economy.

A similar view was given by the Australian National Retailers Association, which said the interest rate increase had the potential to stifle the weak growth in the retail sector and damage consumer confidence in the lead up to Christmas. “We have a long way to go before the retail sector is back to normal and consumers are sensitive to rate rises,” ANRA CEO Margy Osmond warned.

The ANRA’s survey of 1,000 women in September showed that one in two women with mortgages will cut their discretionary spending now the RBA has lifted rates again. Women are set to cutback spending on entertainment, eating out, household items and cosmetics. “With unemployment and interest rates forecast to continue to climb, the outlook for the retail sector is pretty rocky for the next 18 months at least,” Osmond added.

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Posted in Categories: Australia, Economy, Forex, Releases.

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