The Reserve Bank has decided to lift official interest rates by 0.25 percentage points, marking the first increase in rates since December 2003.
The cash rate now stands at 5.5%.
The RBA says its decision to lift rates was based on a number of considerations including the economy's 14th year of expansion, which has made "substantial inroads into the economy's surplus productive capacity".
However, the decision comes ahead of the release of GDP results for the December quarter that are expected to show a marked slowdown in the growth of the economy.
In a statement issued by the RBA, it said other factors include:
- Over recent months, it has become increasingly clear that remaining spare capacity in the labour and goods markets is becoming limited. This is now starting to result in stronger inflationary pressures.
- Price increases at the producer level picked up appreciably at all stages of production during the second half of 2004. Consumer price inflation, although currently consistent with the target, was higher than had been expected, and is forecast to increase to around 3% by the end of next year. Continued pressure on raw materials prices, constraints on capacity and reports of higher employment costs – notwithstanding the steadiness to date of aggregate wage measures – constitute a risk that this forecast will prove to be too low.
- Although Australia's GDP slowed during 2004, this does not appear to have reflected any deficiency in domestic or global demand. Domestic spending has been growing strongly for some time and the global economy last year grew at its fastest pace in more than a decade.
- Conditions prevailing in Australia and abroad are likely to continue to encourage spending growth in the period ahead. The world economy is growing at a faster-than-average pace and world commodity prices are rising. In Australia, there are high levels of confidence in both the business and household sectors, credit growth is providing ample support for spending, employment is growing strongly and national income and spending will continue to be boosted this year by the rising terms of trade.
The Reserve also says the increase in rates is necessary to reduce the risk of an "unacceptable rise in inflation in the medium term".