Australia in surprise rate rise to 4.75%

Tuesday, 2 November 2010 23:03 - - {{hitsCtrl.values.hits}}

SYDNEY, (AFP) - Australia’s central bank lifted interest rates in a surprise move on Tuesday, ending a six-month freeze, as it warned the economy faced a “large expansionary shock” triggered by the mining boom.

The Reserve Bank of Australia (RBA) defied widespread expectations it would leave borrowing costs on hold by boosting the official cash rate by 25 basis points to 4.75 percent.

The move sent the local dollar soaring to near-parity with the greenback.

“At today’s meeting, the board concluded that the balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent,” bank Governor Glenn Stevens said in a statement.

Most economists had expected rates in resource-rich Australia, the only major Western country to avoid recession during the financial crisis, to stay on hold for a sixth consecutive month following recent benign inflation data.

Figures last week showed annual inflation was running at a lower-than-expected 2.8 percent -- with underlying inflation up 2.4 percent for the year, squarely within the RBA’s 2.0 to 3.0 percent comfort zone.

But Stevens said despite evidence that prices were moderating, there were still concerns that inflation would rise again.

“The economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity,” he said.

“Looking ahead, notwithstanding recent good results on inflation, the risk of inflation rising again over the medium term remains.”The Australian dollar, which benefits from higher interest rates as those of the United States and Europe sit at historic lows, surged on the announcement, rising to 99.80 US cents.

The stock market also closed higher with the benchmark S&P/ASX200 adding 2.9 points, or 0.06 percent, to 4,701.4.

Australia led the Western world in lifting rates following the global financial crisis, raising them off 49-year lows with six rapid hikes between October 2009 and May.

The economy is riding a once-in-a-century mining and resources boom driven by enormous demand for raw materials such as iron ore and coal from Asia, including rapidly industrialising China.