AUSTRALIA LIFTS INTEREST RATES

UNCLAS CANBERRA 000913 SENSITIVE SIPDIS STATE FOR EEB AND EAP/ANZ TAGS: EFIN ECON AS SUBJECT: AUSTRALIA LIFTS INTEREST RATES ¶1. (U) SUMMARY: The Reserve Bank of Australia (RBA) today raised the cash rate 25 basis points to 3.25%, becoming the first central bank in the G20 to tighten monetary policy since the GFC began. The RBA cited strong growth in China; rising house prices; a better than expected private investment outlook; inflation not falling as much as expected; and follows three months of better-than-expected economic results. The RBA seems confident growth will continue over the next year and is signaling further but gradual rate rises. END SUMMARY. RBA MOVES EARLY -------------- ¶2. (U) The RBA today lifted the cash rate by 25 basis points to 3.25%, becoming the first G20 central bank to tighten monetary policy since the GFC. It is the first rise since March 2008 and defies conventional wisdom among analysts, since a majority of economists believed the RBA would wait until November to lift rates. The RBA cited strong growth in China; rising house prices; a better than expected private investment outlook; and inflation not falling as much as expected. It believes growth will be close to trend over the next year and therefore it is "prudent to begin gradually lessening the stimulus provided by monetary policy." REACTION -------------- ¶3. (U) Treasurer Wayne Swan said the decision reflected the strength of the economy. He remarked that "Australians are smart enough to know" that interest rates could not remain at emergency lows forever. He reinforced the need for fiscal stimulus, citing weak private investment data and falling national income. Some economists argued the rise was unjustified due to per capita GDP falling in four of the last five quarters. The Opposition linked the interest rate rise to the government's "reckless" spending. The Australian Chamber of Commerce and Industry contended the RBA pulled the trigger too early and that business conditions remained weak. ¶4. (SBU) COMMENT: The RBA has set a precedent among advanced economies by lifting the cash rate, showing it is confident the economy is entering a long-term growth cycle and signaling further but gradual rate rises. GOA monetary policy has begun a tightening cycle that could last several years (the last one was between May 2002 and March 2008). CLUNE