11 Year High for Australian Interest Rates

Many central banks around the world have been cutting interest rates in a bid to soften the blow of a global economic slowdown - the US Fed Reserve being the obvious example - but in Australia, official policy rates have risen to an eleven year high with the news that the Reserve Bank of Australia has increased rates to seven per cent.

In a press release the RBA said that

‘Recent information points to significant inflation pressures.. and reports of high capacity usage and shortages of suitable labour persist. In the short term, inflation is likely to remain relatively high .... given the extent of pressure on capacity and the build up in inflation, a significant slowing in demand from its recent pace is likely to be necessary to reduce inflation over time..’

I have put together a few charts on the Australian economy and these are below. Inflation has been rising and is now above the 2-3 per cent target range. GDP growth has strengthened considerably and the unemployment rate has continued to head sotuhwards towards just four per cent of the labour force. Australia has been out-performing many other advanced economies in recent years, for example the average rate of growth in advanced economies was 2.7% in 2007 (forecast to slowdown to around 2% this year). The hope is that the current monetary policy squeeze will bring about a softening of inflationary pressures without causing too much damage to the housing market and to growth and jobs.