BREAKING NEWS: RBA raises interest rate to 4.25%

The Reserve Bank of Australia has lifted the official cash rate by 25 basis points to 4.25% at its meeting today, saying the global economy has continued to improve and domestic activity is recovering.

In a statement released this afternoon, governor Glenn Stevens said that Australian terms of trade are rising, adding to incomes and helping a build-up in investment in the resources sector.

It comes as the RBA is continuing to lift rates to more “normal” levels as the economy recovers, a move the board has foreshadowed countless times in interviews and speeches over the past few months.

“Under these conditions, output growth over the year ahead is likely to exceed that seen last year, even though the effects of earlier expansionary policy measures will be diminishing. The rate of unemployment appears to have peaked at a much lower level than earlier expected.”

“The process of business sector de-leveraging is moderating, with the pace of the decline in business credit lessening and indications that lenders are starting to become more willing to lend to some borrowers.”

Stevens also said credit for housing has continued to expand at a “solid” pace, and that new loan approvals for housing have moderated over recent months as interest rates have continued to rise, with increase grants no longer being given to first home owners.

Stevens also referenced increasing prices, a topic he discussed last week when he took the unusual step of appearing on television. At that time he spoke out against first home owners taking on large amounts of debt to buy homes, suggesting rising house prices could trigger a debt problem within the country.

Additionally, the statement said that inflation has declined in underlying terms since a peak in 2008, helped by a slowing in private-sector labour costs. With the risk of serious economic contraction now having passed, the board decided to continue lessening the degree of monetary stimulus in the economy.

“Interest rates to most borrowers nonetheless have been somewhat lower than average. The Board judges that with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today’s decision is a further step in that process.”