Australian Economy is Growing – Interest Rate Impact

Australian Economy Snapshot

The Australian economy grew 1.2% in the second quarter of fiscal year 2011. That growth exceeded expectations of a 1% economic expansion. This surprised numerous economic analysts and market observers, who mostly predicted a slower growth in the period. According to some experts, the economic boost could be attributed to stronger performance of several sectors aside from mining, which for quite some time has been solely driving growth of national economy.

Investors look at this news as an additional positive development. A better performing Australian economy could translate to better profitability. Most company shares in the market have been rising following the announcement of the better-than-expected economic growth. The local currency is also gaining strength against the dollar, which is ideal for many businesses, especially those that require importation of raw materials. But what is the impact of this news to consumers, particularly to the interest rates?

Interest rates on hold

The Reserve Bank of Australia has indicated that it would put on hold the key interest rate. Since November 2010, the 4.75% key rate has been maintained by the central bank due to its uncertainties about the slower components of the national economy paired with instability in the global economy. The interest rate has remained unchanged, the longest period of rate stability in the country in five years.

This throws away expectations that the interest rate would soon be lowered. In general, central banks trim down key interest rates to help ease the pressure in the financial markets and to encourage consumers to apply for and obtain necessary loans. Lower rates could lead to higher volumes of loans, which in turn could bring about higher consumer spending that benefits some sectors of the economy like housing and retail.

In the past months, consumer spending has increased across Australia. In the second quarter of the year, it rose by 1%. This was also surprising given the previous wave of strong consumer caution. It was undoubtedly the fastest quarterly expansion in consumer spending within a year. There are indications that this trend would continue.

Australian Economic Outlook

The Federal Treasury is confident that the Australian economy is well positioned and is poised to ride out any instability that prevails globally. Most analysts are now bullish about their outlook on the local economy given the nation’s low unemployment rate, unprecedented business investment pipeline, and enviable public finances. The overall outlook on the country’s economic growth is positive.

Australia is now noted for having a two-speed economy. An active mining industry is keeping the economy afloat. However, it is also affecting the competitiveness of other industries, especially tourism and manufacturing. At the height of the recent global financial crisis, Australian consumers turned more cautious leading to higher savings and slower retail sales.

The Federal Government intends to return to a budget surplus by 2012. Analysts are certain that if that would push through, exchange rates would be further better and pressure could be finally taken off the key interest rate. For now, everyone remains more hopeful.

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