Australia Interest Rates (AU): Changing Course

By: EconomyWatch Content   Date: 28 October 2009

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Australia interest rates have been recently hiked by 0.25% to 3.25% by the country’s central bank to ensure that the inflationary pressures do not derail the economic recovery being witnessed in recent months. The Federal Reserve Bank of Australia (RBA) has also signaled in its latest meeting that further rate increases may follow in the coming months. Australian interest rates were maintained at a low level of 3% for five months, after being gradually reduced from a high of 7% in September 2008, in view of the global economic crisis.

Hike in Australia Interest Rates: Highly Debated

A strong debate about whether the inflationary impact of leaving Australia interest rates unchanged outweighed the benefits of raising them resulted in the central bank’s recent decision to raise the country’s interest rate. Some of the policy members believe that the recent improvement in the Australian economy is a result of the fiscal stimulus and might fade once the stimulus is withdrawn. The strength in the Australian dollar is also likely to result in a contraction in overall activity and thus reduce inflation, the policy members argued. However, the higher-than-targeted inflation levels and improved consumer and business confidence convinced the central bank in favor of raising the interest rates.

Calculation of Australia Interest Rates

The board of the Australian central bank reviews the Australia interest rates on a monthly basis in the context of the overall economic situation and takes a decision on whether to raise, reduce or maintain the rates. These decisions are influenced by the markets, the economic scenario and especially the inflation levels. The RBA generally aims at an inflation level of 2% to 3%. Since the inflation level in Australia has already touched the 3% barrier, the central bank decided to hike Australian benchmark interest rates.

Australia Interest Rates: Future Course

Although the RBA has said that it will adopt a cautious stance in its attempts to return to a cash rate of 5% to 6%, a continued build up of inflationary pressures may force the central bank to become aggressive in the near future. The possibility of further increases in the cash rate in the coming months is high. The hike in Australian interest rates has paved the way for the central banks of other developed countries to follow suit.


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