Australia raises interest rate amid mining boom

[November 02, 2010]  CANBERRA, Australia (AP) -- Australia's central bank jacked up its key interest rate in a surprise move Tuesday that aims to ward off higher inflation as the nation's economy booms amid strong Asian demand for iron ore and other minerals.

The Australian dollar shot up more than one U.S. cent to briefly trade above $1 after the decision to raise the rate by a quarter percentage point to 4.75 percent -- the first hike since May. The currency's move higher reflects that investors expect higher interest rates to attract more foreign money into the country.

The decision was a surprise to most analysts who had predicted there would be no change after figures last week showed lower-than-expected inflation of 2.4 percent in the September quarter.

But the Reserve Bank said in its statement that it expected inflation to go higher because of the country's mining boom -- which is being driven by rising Asian powers China and India as well as advanced nations like South Korea and Japan.

The bank said Australia's economy is facing a "large expansionary shock" because of the high prices its mineral exports are fetching overseas. Australia's terms of trade -- a measure of how much is exported for every dollar of imports -- is at its highest since the 1950s, increasing the country's wealth.

"Looking ahead, notwithstanding recent good results on inflation, the risk of inflation rising again over the medium term remains," Reserve Bank Governor Glenn Stevens said in the statement. "The board concluded that the balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent."

The Reserve Bank also cited strong economic growth and demand for labor in Australia, and said turmoil in international financial markets earlier in the year had abated.

"Global growth will probably ease back to about trend pace over the coming year as strong recoveries in the emerging world give way to a more sustainable pace of expansion and growth remains subdued in the United States and Europe," it said.

Australia was one of the few developed nations do avoid a recession following the 2008 financial crisis. Its economy was insulated by government stimulus spending, less risk-taking by banks, and demand from Asia, in particular China, for commodities.

Economists suggested the central bank's rate hike was aimed at preventing inflation from taking off in 2011.

"It's looking at the large expansionary shock that they're expecting from the terms of trade. To be prudent they've got to look ahead of that," said Nomura Australia chief economist Stephen Roberts. "They're clearly being pre-emptive about what will happen next year."

The Commonwealth Bank of Australia, the country's largest home lender, responded to the rate hike by raising its floating mortgage rate by almost half a percentage point.

Treasurer Wayne Swan described the move as a "cynical cash grab."

"I think Australians deserve a lot better ... it's no wonder Australians are so angry with our banks," Swan told reporters.

He said the government was looking at a range of bank reforms to enhance competition.

[Associated Press]

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.