RBA raises interest rates by 25 points to 3.25%

The Reserve Bank of Australia has raised the official interest rates by 25 basis points to 3.25%, with governor Glenn Stevens saying the decision was based on signs of global economic recovery.

Stevens said in a statement the signs of recovery are set to continue during 2010, with the unemployment rate remaining lower than expected and inflation remaining below the RBA’s target band of 2-3%.

“In late 2008 and early 2009, the cash rate was lowered quickly, to a very low level, in expectation of very weak economic conditions and a recognition that considerable downside risks existed. That basis for such a low interest rate setting has now passed, however.”

“Sentiment in global financial markets has continued to improve… economic conditions in Australia have been stronger than expected and measures of confidence have recovered.”

Stevens also said that while business borrowing and capital investment have weakened, medium-term prospects are improving and higher dwelling activities and public infrastructure spending will provide spending support.

“But large firms have had good access to equity capital and access to debt markets appears to be improving, helped by the better-than-expected economic conditions and increased willingness on the part of investors to accept risk. Share markets have recovered significant ground.”

Stevens also said that growth is likely to close “to trend” over the year ahead, and that the risk of serious economic contraction in Australia has now passed.

“The Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy. This will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.”