The Reserve Bank of Australia increased interest rates on Wednesday for a second consecutive month as it responds to strong domestic spending, a rapid build-up in household debt and an improving global backdrop.
The RBA said it had decided at Tuesday's board meeting - the last of the year - to raise its benchmark official cash rate by a quarter percentage point to 5.25 per cent, building on a similar move in November.
Its announcement came two hours ahead of the release of the national accounts, which were expected to show the Australian economy accelerated in the September quarter to grow at its fastest pace in four years.
Economists had widely expected the increase as part of the bank's intention to return rates to 'neutral' levels, previously identified as between 5.5 and 6.0 per cent.
advertisement
advertisement Australia now has the highest official interest rates in the industrialised world. The equivalent benchmarks are 5 per cent in New Zealand, 3.75 per cent in Britain, 2.0 per cent in Europe and 1.0 per cent in the US.
Speculation about an imminent move, together with broad-based weakness in the US dollar, helped push the Australian dollar overnight to another six-year high at US73.25¢. It also reached 13-year highs on its trade-weighted index.
At the top of the RBA's list of concerns are the risks of a sharp correction in an unfettered housing boom. But it has also cited continued strong momentum in the domestic economy and an acceleration in international activity.
Signs of continued strength in the domestic economy have emerged this week in better-than-expected readings on company profits, inventories, manufacturing orders, retail sales and building approvals.
Likewise, there have been positive global signals in improving measures of manufacturing activity in the US, Europe and Japan.
Australia, alongside the England, has led the world in raising interest rates in recent weeks. New Zealand is not expected to be far behind, although Europe and the US are seen likely to keep their rates low for a few more months at least.
The rising differential between Australian and US rates has been a key factor driving the Australian dollar to six-year highs in recent weeks.
This has drawn complaints from exporters and companies with large offshore earnings. However, the RBA has said it sees the currency's recent appreciation as part of a normal pattern.
The consensus in financial markets is that the Reserve Bank will lift its cash rate at least once more, perhaps at its next meeting in early February and then wait to see how the economy responds.
Some economists have said the bank will be anxious to complete its monetary tightening cycle well before the onset of the general election, which could be held anytime before the end of next year.
The federal government, whose political success owes much to rising house prices and low interest rates, has already expressed discomfort about the RBA raising interest rates at a time when inflation remains low.
