Australia raises interest rates

The strength of Australia's mining sector helped it avoid recessi

Australia has raised its main interest rate to 3.25% from 3%, becoming the first G20 nation to do so as the global economy begins to recover.

The move by its central bank was not unexpected as the Australian economy was the only one in the developed world to expand in the first half of 2009. In fact, Australia managed to avoid recession, only seeing its economy contract in the last quarter of 2008. Its government has helped the economy with major stimulus spending. It has spent 42bn Australian dollars ($35bn; £21bn) on schemes including cash handouts for pensioners and for low and middle-income families, and a number of infrastructure projects.

This helped the economy to grow 0.4% in the first quarter of this year, and by 0.6% in the second, rebounding from the 0.5% contraction between October and December 2008.

'Gradual move'

"The Reserve Bank of Australia (RBA) had widely advertised it was near to edging up rates from their extraordinary lows, and now it's done so," said Rory Robertson, interest rate strategist at Macquarie. "It will be a gradual move from an emergency rate of 3%, to a still-easy 4%." Mr Robertson added that if the Australian economy continued to expand as expected, rates could return to "a more normal 5%" in the next year or two. Tuesday's move is the first time the Australian central bank has increased interest rates since March 2008. The Australian economy has also managed to avoid falling into recession thanks to the strength of its mining sector, which has continued to see strong demand from China for its iron ore and other commodities. "The Australian economy is outperforming other advanced economies, and I guess many economists will see the decision today as a consequence of economic recovery," said Federal Treasurer Wayne Swan.