Central Bank Of Australia Raises Interest Rate 25 Basis Points To 3.25%

The Central Bank of Australia raised its policy interest rate from 3.00% to 3.25% today, the first of the Group of 20 to increase interest rates since the start of the global financial crisis in late 2007.

In relative terms, the recession in Australia has been mild.  The first two charts comparing the levels in the rate of unemployment and the changes in Gross Domestic Product with those in the United States and the Euro Area show that there has been considerably less unemployment in Australia and that its decline in total activity has been milder and of shorter duration.  GDP in Australia has actually increased in the first two quarters of 2009.

Among the reasons for Australia's better performance is the condition of its financial system.   Australia's financial system had not been disrupted to the extent that those of the Americans, British and Europeans had been by unsound practices.  Moreover, demand for Australian natural resources has been maintained at relatively high levels.  After a slow down in late 2008 Australia's most important trading partner, China, rapidly regained its high growth trend in 2009 and its demand for Australia's resources.

Economic conditions in Australia in recent months have been stronger than expected.   The Reserve Bank of Australia publishes quarterly forecasts of GDP.  Its last two forecasts of May 2009 and August 2009 are shown in the third chart compared with the actual results in the first and second quarters of 2009.  In May, the Bank was forecasting year over year percent declines for the four quarters of 2009 and for the first quarter of 2010.  The Bank raised its forecast in August but still actual conditions were stronger than expected. The bank's forecast for the first and second quarters of this year--0.40%  and 0.25% year over year increases-were below the actual year over year increases of 0.32% and 0.53% .