Australia follows S. Korea with rate rise


Australia's economy could grow by up to 4.0 percent this year

By Geoff Hiscock
CNN Asia Business Editor

SYDNEY, Australia (CNN) -- Australia has followed South Korea with an interest rate rise, lifting the official cash rate a quarter of a percentage point Wednesday to 4.5 percent.

The widely expected move by the Reserve Bank of Australia, designed to rein in inflation, was its first action since it cut the cash rate to 4.25 percent in December.

It comes as the U.S. Federal Reserve left rates unchanged Tuesday at 1.75 percent, with the Fed's open market committee saying the U.S. economy still needed time to recover.

On Tuesday South Korea 's central bank surprised markets by raising rates a quarter of a percentage point, taking the overnight call rate target for May to 4.25 percent.

Driven by strong consumer demand, Australia and South Korea are the two fastest-growing advanced economies in the Asia Pacific region, with Australian GDP tipped to expand about 4 percent this year and South Korea heading for 5.7 percent growth.

Credit Agricole analyst Ray Jovanovich told CNN Wednesday that the rate rises were "sensible moves", helping to let a little of the steam out of the two economies.

N.Z. first to move


The central bank says inflation is near the top of its target range

New Zealand was the first country in the region to move on rates, lifting its official cash rate from 4.75 percent to 5 percent on March 20.

Australia was expected to follow in early April, but the central bank surprised the market by leaving rates on hold for another month.

Reserve Bank of Australia governor Ian Macfarlane said in a statement Wednesday that inflation, at 2.9 percent, was close to the top of the target range.

He said the bank's view was that to persist with a "strongly expansionary" policy setting would risk amplifying inflation pressures.

He said that while Australia would likely see a moderate decline in inflation over the next few quarters, in the longer term inflation pressures were likely to continue as surplus capacity in the economy was gradually used up.

Economy 'well placed'

He said the Australian economy appeared "well placed" to continue its strong performance.

"Businesses are expanding their investment plans, and household spending has continued to grow strongly, supported by an upturn in employment and by rising wealth associated with increases in house prices," he said.

On Monday, one of Australia's key leading indicators of the economy, the ANZ Bank survey of job advertisements in major newspapers, showed a healthy jump in April job ads.

In his statement Wednesday, Macfarlane noted that the global economic climate had changed markedly, with the U.S. downturn that began last year proving to be milder and shorter than first thought.

"While more recent indicators suggest that the pace of growth in the United States will ease for a time, the recovery to date has clearly exceeded earlier expectations," he said.

The Australian stock market reacted positively to the rate rise, with the benchmark S&P/ASX200 up about half a percent in early trade.

The Australian dollar was slightly firmer against the greenback, trading at 54.07 to 54.11 U.S. cents.