Australian central bank lifts interest rate by quarter point to 3.25

The Associated Press ~ staff The News
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SYDNEY, Australia - Australia's central bank unexpectedly raised interest rates by a quarter point Tuesday, the first major economy to increase the cost of borrowing amid signs its recovery from the global slump is gaining momentum.
The Reserve Bank of Australia raised its cash rate to 3.25 per cent from a 49-year low of 3 per cent. Between September 2008 and April this year, the rate was slashed a total of four and a quarter percentage points as the financial crisis morphed into a global recession.
The central bank's governor Glenn Stevens said it was "prudent" to begin gradually reducing the stimulus provided by low interest rates. He said the risk of "serious economic contraction" in Australia had passed.
The rate hike comes after recent economic data pointing to improving conditions in the Australian economy.
Stevens said the global economy was growing and its recovery was likely to continue during 2010. The prospects for Australia's Asian trading partners appeared to be "noticeably better," he said.
"Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets," Stevens said. "For Australia's trading partner group, growth in 2010 is likely to be close to trend."
Most economists had expected the central bank to leave the interest rate unchanged until November.
Federal Treasurer Wayne Swan said the global economic outlook was still fragile, and growth was below its long-term average levels. This meant stimulus measures, including low interest rates, could not be fully withdrawn yet, he said.
"We must still keep in place expansionary monetary and fiscal policy," Swan told a news conference.
Economists were split on whether the move came too soon.
National Australia Bank senior economist Spiros Papadopoulos said the central bank clearly had more confidence about the outlook for the economy to take the action it did.
"We felt that the Reserve Bank would have waited another month to get further information that the recovery would be sustained but they are feeling confident that it will be," he said.
Papadopoulos said a 3.25 per cent cash rate was still providing stimulus for the economy.
"It is still a very low interest rate," he said.
The Australian dollar jumped from $US0.8671 just before the RBA's announcement to $US0.8844 less than 10 minutes later.

Organizations: Reserve Bank of Australia, National Australia Bank

Geographic location: Australia, SYDNEY, China

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