Australia raises interest rates as economy rebounds

Australia raised interest rates on Tuesday for the fourth time since October, in a widely anticipated move that showed that the central bank remains confident in the country's rebound despite still-difficult international credit conditions and lingering concerns about the debt levels of several European countries.

The Reserve Bank of Australia raised its key cash rate by a quarter of a percentage point to four percent, taking the total amount of rate increases since Oct. 7 to 1 percentage point.

'In Australia, economic conditions in 2009 were stronger than expected, after a mild downturn a year ago,' said Glenn Stevens, the Governor of the central bank, in a statement accompanying the rate decision. 'Labour market data and a range of business surveys suggest growth in the economy may have already been at or close to trend for a few months.'

The Australian dollar rallied briefly against the U.S. dollar right after the central bank's decision Tuesday but then slipped back to just below 90 U.S. cents. Australia's higher rates and growth prospects have fueled a massive rally in the country's currency: one year ago, the Australian dollar stood at only 63 U.S. cents.

The central bank had surprised analysts last month when it held off raising rates, citing global jitters over a potential default in countries like Greece and saying it wanted to await evidence of how the previous rate increases had affected the economy.

On Tuesday, the Reserve Bank of Australia said the sovereign debt worries remain 'elevated', but with growth in Australia now approaching normal levels, it is now appropriate for rates in Australia to be closer to average.

Analysts say that this means the key rate will rise by at least another half a percentage point this year, though the pace of further increases is likely to slow.

'The R.B.A.'s balancing act is becoming more precarious,' said Fred Neumann, an economist at HSBC in Hong Kong, in a note on Tuesday, referring to the Reserve Bank of Australia. The central bank, he added, now has to steer an increasingly cautious course: it needs to temper a red-hot minerals sector and surging jobs growth, but do so without seriously damaging household debt, which has been soaring as the economy picked up.

'In essence, this requires careful tightening at a measured pace, and we consequently expect a 25 basis point hike in the second quarter, a pause in the third quarter, and a final 25 basis point push in the final three months of the year', Neumann wrote.

Either way, Australia's process of normalizing the cost of borrowing again is in stark contrast to other developed nations, including the United States and Europe, whose recovery began later and remains more feeble.

Neither the European Central Bank nor the U.S. Federal Reserve is expected to start nudging up interest rates again until much later this year. Australia, by contrast, has benefited from fast-growing China's voracious appetite for its natural resources, and statistics due out on Wednesday are expected to show Australia's gross domestic product grew 0.9 percent in the fourth quarter from the previous three months, according economists surveyed by Bloomberg News.

Many other nations in the Asia-Pacific region are also now under pressure to start raising rates again or implement other measures to cool down their rapid growth and damp nascent inflation.

Among the next to start nudging up rates may be Malaysia, whose economy grew a greater-than-forecast 4.5 percent last quarter from a year earlier.

Wai Ho Leong, an economist at Barclays Capital in Singapore wrote in a note Tuesday that he now expected the Malaysian central bank to state its first rate increase as soon as May.

South Korea, he added in a separate note, is likely to hold off a little longer and start normalising rates with a quarter-point rise in the second quarter of this year at the earliest.