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Wednesday, 5 June, 2002, 05:25 GMT 06:25 UK
Soaraway Australia raises rates
Surfer
Low interest rates have fuelled a consumer boom
Australia's economy has continued to grow rapidly, prompting the country's central bank to raise interest rates for the second time in a month.

Shrugging off talk of a slowdown, Australian gross domestic product (GDP) grew by an annual 4.2% in the first three months of the year, one of the strongest performances among large developed economies.

The Reserve Bank of Australia, which warned last month that interest rates would have to keep on rising to check overheating, added another quarter-point, taking its key rate to 4.75%.

The Bank said it was concerned that inflation, although not yet rampant, was creeping towards the top of its target range, as consumer spending continued to grow unchecked.

Foot on the brakes

The latest GDP figure came in a little below expectations, but analysts pointed out that this was in large part due to a sharp fall in public investment.

With that investment due to speed up later in the year, the Reserve Bank foresaw a need to keep its foot on the monetary brakes.

Last year, the Bank cut borrowing costs by a total of 200 basis points, something that helped fuel a runaway housing market and strong consumer sentiment.

Against that backdrop, the Bank's warnings on future rate rises were not universally welcome.

"Australian growth remains robust but the purpose of interest rate rises is to slow that growth down," said Phil Naylor, chief executive of the Australian Retailers Association.

Way to go

A week ago, Reserve Bank governor Ian Macfarlane told a parliamentary committee that he saw a neutral real interest rate setting at 3-3.5%, equivalent to a cash rate of about 5.5-6%.

Other economies - including New Zealand, Canada and Sweden - have started raising rates this year, and the UK, US and Europe are expected to follow suit later in the year.

As well as calming growth domestically, higher Australian interest rates should help boost the Australian dollar, which could benefit from a weakening US currency.

A stronger Australian dollar will, however, hit some of the country's key commodity export sectors.

See also:

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