Australia's central bank raises interest rate to 7%

Australia’s central bank raised its official cash interest rate by 25 basis points to 7% today, its highest since 1996.

Reasons for the increase included significant inflation pressures on the Australian economy, Reserve Bank of Australia governor Glenn Stevens said.

The rise had been widely expected by investors.

Mr Stevens said the bank board was concerned about inflation in Australia even though it had noted that the world economy was slowing.

“The world economy is slowing and it now appears likely that global growth will be below trend in 2008,” Mr Stevens said.

“Recent trends in world commodity markets suggest, however, that Australia’s terms of trade are likely to rise further.”

He said the board had carefully considered recent events on financial markets.

“The pressures in short-term money markets seen late last year have eased in recent weeks, but sentiment in international capital and equity markets remains fragile,” he said.