Australia hikes on further evidence of recovery

The Reserve Bank of Australia on Tuesday raised its benchmark cash rate by 25 basis points to 4% on the back of strong growth in Asia.

Glenn Stevens, the governor of the Reserve Bank, noted after the decision that growth in Asia was so strong that the authorities in some countries were now seeking to reduce the degree of stimulus to their economies.

The People's Bank of China has already hiked its reserve requirement ratio twice this year.

On the back of strong Asian growth, the Australian economy had outperformed forecasts. "Economic conditions in 2009 were stronger than expected, after a mild downturn a year ago. The rate of unemployment appears to have peaked at a much lower level than earlier expected," Stevens said. "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." Signs of a pick-up in credit for consumers and businesses provided further impetus for recovery. Inflation was set to be consistent with the Reserve Bank's 2-3% target for 2010. The risk of a serious economic contraction had passed.

Stevens flagged better functioning global financial markets and noted governments and central banks were winding back their extraordinary support, though credit conditions and sovereign risk remained causes for concern.

He signalled the Reserve Bank would tighten further in the coming months. "Interest rates to most borrowers remain lower than average," he said. "The Board judges that with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average."

The ASX 200 benchmark index of leading shares listed in Australia closed up 0.33% at 4701.9. Economists expected the hike.

The rise takes effect on Wednesday.

Click here to read the Reserve Bank's statement