The Reserve Bank of Australia (RBA) raised the cash rate yesterday by 25 basis points to 4.75%. This highlights the strength of the Australian economy and the requirement to take on-baord inflationary pressures. The RBA targets inflation between 2 – 3%. Below is part of the statement issued by the RBA.
However, the economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity. Looking ahead, notwithstanding recent good results on inflation, the risk of inflation rising again over the medium term remains. At today’s meeting, the Board concluded that the balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent.