By Mike Caggeso
Associate Editor
The Reserve Bank of Australia raised its benchmark interest rate to 7.25% - the highest rate in 12 years and the second rate increase in four weeks - in an effort to bat down the commodity-driven inflation spell that’s hampering economies around the world.
It’s the 12th consecutive quarter-point rate increase since May 2002, when the rate was raised to 4.25%.
"This adjustment was made in order to contain and reduce inflation over the medium term," Reserve Bank Governor Glenn Stevens said in a statement, citing a 3% spike in the fourth-quarter consumer price index and domestic demand eclipsing the economy’s productive capacity.
Stevens said inflation will likely remain "relatively high in the short term" and would probably rise more by the end of the year. He expects domestic demand to slow next year.
Just as equally problematic, however, are the teeter-toting effects of high commodity prices and credit crises - a one-two punch that drives up consumer prices and makes it more difficult to attain credit.
Stevens acknowledged "tentative evidence" that household demand is moderating, but to an uncertain extent. However, "as the Board noted last month, a significant slowing in demand from its pace of last year is likely to be necessary to reduce inflation over time," Stevens wrote.
All things factored though, commodity spikes strengthen Australia’s trade prospects.
"The Reserve Bank thinks for the time being it has done enough and will sit back to see how things unfold," Shane Oliver, chief economist at AMP Capital Investors in Sydney, told Bloomberg.
New Zealand Rate to Hold
Off the Western coast, economists are forecasting that New Zealand’s Reserve Bank will hold its benchmark rate at 8.25%.
"Over the past few years household spending has proven incredibly resilient to higher interest rates and growing costs," ASB chief economist Nick Tuffley told the New Zealand Herald. "However there is always a last straw on the camel’s back. Recent fuel and food price rises, and higher mortgage funding costs due to the global credit crunch, are all candidates."
Reserve Bank Governor Alan Bollard increased the rate four times last year, driving the New Zealand dollar [called the kiwi] to near record highs against the U.S. dollar. Rising wages and income tax cuts have driven the kiwi up 4% this year.
Bollard said in January’s Monetary Policy Statement that annual inflation would exceed 3% until next year.
"On balance, the outlook for interest rates is little changed from the December Monetary Policy Statement, but the level of uncertainty has increased," Bollard wrote.
News and Related Story Links:
- Reserve Bank of Australia:
Monetary Policy Statement by Glenn Stevens, Governor
- New Zealand Herald:
Imminent rate cut ruled out by experts
- Reserve Bank of New Zealand:
January 2008 Monetary Policy Statement