Australia raises rates for second month in a row

SYDNEY (AFP) - Australia's central bank hiked interest rates by 25 basis points for a second successive month on Tuesday, saying the improving economic outlook and expected growth in Asia justified the move.

Central bank governor Glenn Stevens said the bank had decided to up the official cash rate to 3.50 percent, its highest level since February, citing "noticeably better" conditions for Australia's major regional trading partners.

"Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets," Stevens said.

"For Australia's trading partner group, growth in 2010 is likely to be close to trend."

Australia last month became the first advanced economy to raise interest rates since the global financial meltdown, declaring the risk of a recession over and lifting rates from 50-year lows.

The interest rate rise comes after the government on Monday sharply lifted its economic forecasts, flagging growth of 1.5 percent instead of a 0.5 percent contraction and indicating that unemployment will peak at a relatively modest 6.75 percent.

Australia was also the only major Western nation to avoid a recession in the worldwide slump and posted growth of 0.6 percent in the three months to June -- the best in the developed world.

The central bank aggressively slashed the rate from 7.25 percent last September to a 49-year low of 3.0 percent, while the government injected stimulus worth more than 70 billion dollars (63 billion US) into the economy.

Stevens said economic conditions had been stronger than expected and measures of confidence had improved thanks to the stimulus measures, while private investment appeared not be as weak as forecast.

Housing and public infrastructure spending were accelerating, and Stevens said there were early signs of an improvement in labour market conditions.

Growth was likely to be close to trend and inflation near to the official target of 2.0 to 3.0 percent, while unemployment was likely to peak at a "considerably lower level" than previously forecast.

"With the risk of serious economic contraction in Australia now having passed, the Board's view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker," Stevens said.

Treasurer Wayne Swan said the economy was recovering and "rates could not stay at 50-year emergency lows forever".

The result was in line with market expectations of a modest rise, following the release of the lowest inflation figures in 10 years last week.

Analysts said Stevens' tempered remarks pointed to a likely pause in further increases to the cash rate until 2010.

"The specific language ... could possibly suggest the RBA believes it has done enough for the time being, possibly pausing over December and January before reassessing the appropriateness of the cash rate in February," said IG Markets analyst Cameron Peacock.

The RBA had never in its history raised rates for three consecutive months, said CommSec economist Savanth Sebastian.

"I think there's a good chance they will pause in December and come back in February to do the rest of their work," Sebastian said.

Despite the bank's confidence in the economy, shares in Sydney fell 0.20 percent to 4,531.5 points, with market-watchers saying the increase had already been factored in.