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Global Business

Australia Raises Key Interest Rate

Published: October 6, 2009

(Page 2 of 2)

The bank also said the Australian economy was likely to return to “trend” growth levels, which economists put at about 3.5 percent per year, in 2010. That is an improvement from a relatively gloomy forecast of 2.25 percent, issued in August.

“In the space of a month, they’ve raised their growth forecasts by more than 1 percent; that’s huge,” said Bill Evans, the chief economist at Westpac Banking Corp. “But nothing has happened in the past month that would justify that sort of an increase. It does come as a bit of a surprise.”

“I think they now realize that they went too far and their forecasts for the labor market, business investment and growth were profoundly too pessimistic,” Mr. Evans said.

Australia has benefited from its proximity to Asia’s emerging economic powerhouses, and from continued strong appetite in China for its natural resources. “Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets,” Mr. Stevens said.

Craig James, the chief economist at Commsec, the trading arm of the Commonwealth Bank of Australia, said the central bank’s decision was a clear sign that the center of gravity for Australia’s economy was shifting.

“The Reserve Bank paid a lot of attention to China in the statement today, focusing on prospects for Asian trading partners. It hasn’t mentioned Europe, Japan or the United States once,” Mr. James said. “With China expanding strongly, that’s good news for us down under, because our two economies will be very much linked over the coming decades because China relies on our resources.”

Mr. James and Mr. Evans at Westpac said they expected the bank to raise its cash rate to a higher, but still stimulatory, rate of between 4 percent and 4.5 percent within the next 12 months before eventually returning to a more “neutral” level of between 5 percent and 5.5 percent — though Mr. James added: “It doesn’t need to get there in a super-fast hurry.”

Both economists cited Australia’s relatively strong financial position going into the global financial crisis as the main reason for Tuesday’s rate increase.

“It looks like we’re an outlier,” said Mr. Evans. “We’ve had everything going for us. We’ve had a very aggressive fiscal response because we started the cycle in surplus and negative net debt for the government, which none of these other governments have enjoyed.”

Australia’s stock market was undaunted by the interest rate increase. The benchmark S&P/ASX 200 index closed 0.4 percent higher Tuesday. The Australian dollar soared to a 14-month high against its U.S. counterpart.

Meraiah Foley reported from Sydney. Carter Dougherty contributed reporting from Frankfurt.