Australia's central bank raised its benchmark interest rate to 4.25 per cent and signalled further increases, dismissing warnings that higher borrowing costs are already eroding consumer spending.
Governor Glenn Stevens boosted the overnight cash rate target from 4 per cent, the Reserve Bank of Australia said in a statement in Sydney today.
The Australian currency and bond yields rose after Stevens said the move was a "further step" in returning interest rates to average levels. Today's decision indicates central bank concerns that inflation and house-price increases will surge without greater monetary restraint, even after retail sales and home construction dropped in February.
"We've got a way to go before we see rates at normal levels," said Adam Carr, a senior economist at ICAP Australia Ltd in Sydney. "There's a good case we'll see much stronger than normal growth rates with much higher than normal inflation and I think the RBA is aware of that."
The Australian dollar jumped to a two-week high against the US currency, trading at 92.25 cents from 91.85 before the decision. Two-year government bonds fell, pushing the yield on the 5.75 per cent security maturing in April 2012 up by 12 basis points to 5.07 per cent, the highest since October.
Inflation in Australia reached 2.1 per cent in the quarter to December, up from 1.3 per cent the previous three months, while still inside the central bank's target range of between 2 per cent and 3 per cent.
A gauge of Australia's inflation rose in March at five times the pace of the previous month, a report showed last week. Consumer prices advanced 0.5 per cent from February, when they climbed 0.1 per cent, according to an index compiled by TD Securities Ltd. and the Melbourne Institute.
Bloomberg