The Reserve Bank of Australia (RBA) has raised the cash rate by 25 basis points to 4.25 per cent, saying growth and inflation are around trend and it is appropriate for interest rates to be closer to average.

“With the risk of serious economic contraction in Australia having passed some time ago, the board has been lessening the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker,” the central bank said in a statement on Tuesday.

“Lenders have generally raised rates a little more than the cash rate.

“Interest rates to most borrowers nonetheless have been somewhat lower than average.

“The board judges that with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average.

“Today’s decision is a further step in that process.”

The move came after the RBA board meeting earlier on Tuesday in Sydney, and was in line with most expectations.

Nine of 15 economists surveyed by AAP had expected the central bank to increase the cash rate by 25 basis points on Tuesday.

It is the fifth time from the past six board meetings that that RBA has lifted the cash rate.

The cash rate has not been that high since February 2009.

Australia’s terms of trade are rising, adding to incomes and fostering a build-up in investment in the resources sector, the RBA said in its statement released after its board meeting.

“Under these conditions, output growth over the year ahead is likely to exceed that seen last year, even though the effects of earlier expansionary policy measures will be diminishing.”

The board said the rate of unemployment appeared to have peaked at a much lower level than earlier expected.

It also said the process of business sector de-leveraging was moderating, with the pace of the decline in business credit lessening and indications that lenders are starting to become more willing to lend to some borrowers.

Credit for housing has been expanding at a solid pace and new loan approvals for housing have moderated over recent months as interest rates rose and the impact of large grants to first-home buyers has tailed off.

“Nonetheless, at this point the market for established dwellings is still characterised by considerable buoyancy, with prices continuing to increase in the early part of 2010.

“Inflation has, as expected, declined in underlying terms from its peak in 2008, helped by a noticeable slowing in private-sector labour costs during 2009, the rise in the exchange rate and the earlier period of slower growth in demand.”

The central bank said CPI inflation had risen recently as temporary factors that were holiding it to quite low rates had begun to abate.
“Inflation is expected to be consistent with the target in 2010,” the RBA said.

The central bank said the global economy was expected to rise at close to trend pace in 2010 and 2011.

The economic expansion is still hesitant in the major countries due to the continuing legacy of the financial crisis, resulting in ongoing excess capacity.

But in Asia, where financial sectors were not impaired, growth had continued to be quite strong, contributing to upward pressure on prices for raw materials.

“Global financial markets are functioning much better than they were a year ago and the extraordinary support from governments and central banks is gradually being wound back.

The central bank said credit conditions remained difficult in some major countries as banks continued to face loan losses associated with the period of economic weakness.

However, the concerns regarding some sovereigns appeared to have been contained at this stage.

AAP