Australia raises key interest rate to 4%

Reserve Bank of Australia Governor Glenn Stevens increased the benchmark overnight cash rate target to 4 percent from 3.75 percent in Sydney yesterday, as forecast by 14 of 19 economists in a Bloomberg News survey. The rest saw no change. Stevens said rates should be closer to “average,” which he last week signaled may be 75 basis points higher than yesterday's new level.

The biggest jobs boom in more than three years and a surge in business confidence suggest Australia's economy is already growing at or close to trend, after escaping recession during the global crisis, Stevens said. Today's decision indicated the economic figures outweighed concerns about global sovereign debt risks, which helped convince the RBA to stand pat last month.

“It seems they are determined to deliver a rate hike every couple of months or so,” said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney. Still, there is enough global risk “out there that they'd want to be a bit cautious about” another move in April, he added. The RBA paused last month after sovereign-debt risks sparked by Greece sent the euro and emerging stock markets tumbling.

Retail Sales

The announcement came hours after the government reported retail sales climbed 1.2 percent in January from December, exceeding the forecasts of all 19 economists in a Bloomberg News survey. A separate report showed home-building approvals fell in January, affected by the Reserve Bank's rate increases and a reduction in government grants to first-time buyers.

Evidence of faster growth convinced most economists in a Bloomberg News survey on Feb. 26 to predict yesterday's move, after a majority in an earlier Feb. 12 survey saw no change. Sovereign debt concerns have caused the euro to tumble since the start of the year and emerging stock markets to retreat.

“Credit conditions remain difficult in some major countries as banks continue to face loan losses associated with the period of economic weakness,” Stevens said. “Concerns regarding some sovereigns remain elevated.”

Today's move makes Stevens the first central banker from a Group of 20 economy to boost benchmark rates this year, after leading the way in presiding over three moves in the fourth quarter. The increases brought the rate up from a half-century low of 3 percent.

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