The Reserve Bank of Australia yesterday lifted the overnight cash rate by 25 basis points to 4.0%. The move was widely expected by economists and currency strategists, considering the overall optimistic tenor of recent economic data and the fact that current rates are low on a historical average.

St. George, ANZ, and Commonwealth Bank passed the higher rates on to their borrowers shortly after the RBA announcement, raising the cost of credit for mortgages, personal and small business loans. The higher rates could also impact credit card interest rates over time.

Many economists expect the year 2010 to end with the RBA rate at 5.0%, returning borrowing costs to a more normal trend and level. RBA Governor Glenn Stevens acknowledged in his statement that higher rates are on the way.

“The board judges that with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average,” said Mr. Stevens.

Stephen Walters, a senior economist with JP Morgan, is one of those expecting 5.0% by December 2010. He predicts the next move is not likely until May, unless economic data strengthens significantly, more quickly than expected.

“There is little doubt that Australia’s cash rate is too low,” Mr. Walters said, “particularly given that our economic caboose increasingly is hitched to Asia’s train.”

Although higher interest rates could potentially cause the Australian dollar to strengthen against other nations’ currencies, particularly the Japanese yen, Euro, and U.S. dollar, such a move did not happen at the announcement. The Australian dollar remained around 90 U.S. cents and 80 yen overnight.

Another announcement yesterday came from the Australian Bureau of Statistics, indicating January retail sales rose 1.2%, better than doubling the 0.5% expected by economists. Shoppers splurged with $20.1 billion going into merchants’ tills, much of it going to large department stores.

A more sobering figure was building approvals, which decreased −7.0% in January for the first time in five months. Economists had been expected a gain of 1.0%.

Source: http://www.news.com.au/