The Reserve Bank of Australia (RBA) has raised the cash interest rate and says it is prudent to begin lessening the monetary policy stimulus in the local economy because conditions are improving.
It has lifted the cash rate by 25 basis points to 3.25 per cent after its board meeting on Tuesday.
The move was not widely expected, with most economist tipping the central bank would leave rates unchanged.
But recent economic data has pointed to improving conditions in Australia, which has been buffeted by the global downturn over the past year.
“With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy,” RBA governor Glenns Stevens said in a statement.
“This will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.”
Mr Stevens says the global economy was resuming a growth path and its recovery was likely to continue during 2010.
The global expansion was generally expected to be modest in the major countries, due to the continuing legacy of the financial crisis.
But the prospects for Australia’s Asian trading partners appeared to be “noticeably better”.
“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.
“For Australia’s trading partner group, growth in 2010 is likely to be close to trend.”
In Australia economic conditions have been stronger than expected and confidence has recovered.
Mr Stevens noted that some spending had probably been brought forward by various government policy initiatives, and that as those effects diminished demand may soften.
But even while some types of capital spending may be held back for a while by financing constraints, it now appears private investment will not be as weak as earlier expected.
Mr Stevens said, in fact, the medium-term prospects for investment appeared to be strengthening.
“Higher dwelling activity and public infrastructure spending is also starting to provide more support to spending,” he added.
“Overall, growth through 2010 looks likely to be close to trend.”
The RBA noted that housing credit growth has been solid and dwelling prices have risen “appreciably” over the past six months.
Business borrowing had been declining, as companies sought to reduce leverage in an environment of tighter lending standards.
“But large firms have had good access to equity capital and access to debt markets appears to be improving, helped by the better-than-expected economic conditions and increased willingness on the part of investors to accept risk,” Mr Stevens said.
“Share markets have recovered significant ground.”
Mr Stevens said the board had noted rates of fixed rate loans had already risen as financial markets anticipated a higher level of the cash rate.
“For many business borrowers, increases in risk margins will still be occurring for some time yet,” he said.
“In addition, the exchange rate has appreciated considerably over the past year, which will dampen pressure on prices and constrain growth in the tradeables sector.
“These factors have been carefully considered by the board.”
Nevertheless, the basis for such a low cash rate had now passed, Mr Stevens said.
The cash rate had, until Tuesday, been at its lowest level in 49 years – a level the central bank had previously described as an emergency setting.
Mr Stevens said despite the recent crisis, unemployment had not risen by as much as had been expected.
“The weaker demand for labour over the past year or so nonetheless has seen a moderation in labour costs,” he said.
“Helped by this and the earlier fall in energy and commodity prices, inflation has been declining, though measures of underlying inflation remained higher than the target on the latest reading.
“Underlying inflation should continue to moderate in the near term, but now will probably not fall as far as earlier thought.”