Interest rates on the rise

The Reserve Bank has raised its key interest rate, making Australia the first developed nation to reverse the cycle of cuts triggered by the global financial crisis.

Analysts say more increases are on the way.

Today's 25-basis-point rise pushes the central bank's cash rate to 3.25 per cent and will add $40 to the average monthly payment for a typical $300,000 mortgage if passed on by commercial banks. The extra cost may stretch household budgets at a time when unemployment remains on the way up.

''Economic conditions in Australia have been stronger than expected and measures of confidence have recovered,'' Glenn Stevens, governor of the RBA said in a statement accompanying the rate increase. ''[The] basis for such a low interest rate setting has now passed,'' he said.

''I think it's pretty clear that (the RBA is) increasingly comfortable that growth outlook appears durable,'' said RBC Capital Markets economist Su-Lin Ong.

''They talk about a return to close-to-trend growth in the year ahead so obviously Australia is proving resilient throughout all of this.''

The Australian dollar jumped on the rate news, adding more than three-quarters of a US cent to 88.4 US cents, its highest in almost 14 months. Stocks, though, fell, trimming the day's gains.

Investors are rating the chance of another rate rise when the RBA board next meets at 40 per cent. In one year's time, rates will be up to 5.25 per cent - implying eight more quarter-point increases by then.

Today's rate hike - the first shift in either direction since April, when rates were reduced to 3 per cent, and the first increase since March 2008 - is the surest sign yet that the local economy is on the mend.

Source: www.smh.com.au
Interest rates on the rise
CHRIS ZAPPONE