Governor Glenn Stevens and his board increased the overnight cash rate target to 7 percent in Sydney today, as forecast by all 27 economists surveyed by Bloomberg News. The bank also boosted rates in August and November.
Australia becomes the first developed nation to raise borrowing costs after Federal Reserve Chairman Ben S. Bernanke cut the U.S. rate last week in the fastest easing of monetary policy since 1990. Central banks across Asia and Europe face challenges balancing the threat of a global economic slowdown against signs of quickening inflation as commodity prices soar.
The Australian dollar traded at 90.54 U.S. cents at 2:33 p.m. in Sydney from 90.65 cents before the rate increase. The yield on the two-year bond fell 2 basis points to 6.74 percent.
The gap between the Australian and U.S. benchmark rates rose to 4 percentage points today, the widest in more than three years. That may drive demand for Australia's currency, which has climbed 17 percent against the U.S. dollar in the past year as investors flocked to the nation's higher-yielding assets. There are signs that higher borrowing costs may be starting to damp the economy's 16-year expansion.