Australia Raises Interest Rates Again


As Australia continues to show strong signs of economic recovery, the Reserve Bank of Australia raised interest rates for the fourth time since October. The RBA raised its key cash rate by a quarter of a percentage point to 4%, and has has now raised the rate by one full percentage point since Oct. 7.

China's demand for natural resources is driving Australia's recovery, which is causing a surge in job growth. Just one project, the Gorgon natural gas venture, funded with major investments by Chevron (CVX), Exxon Mobil (XOM) and Royal Dutch Shell (RDS.A), is forecast to add as many as 10,000 jobs.

Mining ventures are also receiving substantial new investment. For example, BHP Billiton (BHP), the world's largest mining company, said it will increase capital spending on iron-ore mines and oil fields by 63% next year, to $20.8 billion. The Australian Bureau of Agricultural and Resource Economics forecasts that commodity exports may jump next fiscal year by 15%, to a total of A$187 billion.

The signs of Australia's recovery are fairly clear:

  • GDP growth is up to 3.25% from 2% last year.

  • Employers added 194,000 jobs in five months through January, the most in almost three years. The country's unemployment rate is at an 11-month low of 5.3%. Australia's unemployment rate never topped 6% during the global recession.

  • Business investment jumped in the fourth quarter to almost three times the pace analysts expected, as companies raised their forecasts for future investments to a five-year high.

  • House prices jumped 11.8% in the year through January, according to a report by real-estate monitoring company RP Data-Rismark.

Australia gave its economy a nudge last year when Prime Minister Keven Rudd spent $20 billion on roads and schools. That extra boost helped Australia pick up growth in the fourth quarter.

Other countries may soon join Australia in raising interest rates. Malaysia's economy grew at a 4.5% rate, faster than projected, and its exports are projected to grow by 6% to 7% this year. Indonesia's inflation was at a nine-month high, according to a report on Monday. Canada also is experiencing the fastest expansion since 2000, according to a report released late Monday.

Australia's dollar now stands at 90 U.S. cents, up from just 63 U.S. cents a year ago. If Australia continues on its current growth path, the Australian dollar could strengthen even more. Analysts expect the Reserve Bank of Australia to raise rates by at least another half a percentage point by the end of the year, but will act cautiously when timing these increases as the RBA watches the economy in both Australia and around the globe.