Interest Rates in Australia Are Raised to a 12Year High

SYDNEY, Australia — Australia’s central bank raised interest rates to a 12-year high Tuesday in another attempt to contain inflationary pressures in an economy fueled by China’s hunger for resources.

The increase was the second in two months and the 12th since 2002. It runs counter to the trend among many other central banks, which are cutting rates as subprime mortgage problems in the United States have hurt global growth.

“This adjustment was made in order to contain and reduce inflation over the medium term,” Glenn Stevens, governor of the Reserve Bank of Australia, said in a statement after raising the cash rate target 25 basis points, to 7.25 percent.

Even if China’s expansion gives Asia a measure of protection from a slowdown in the United States, the region’s financial markets have no such umbrella.

Along with exchanges in much of the rest of the region, Australia’s stock market has been falling in the last three months, and it dropped 1 percent Tuesday. It is now more than 21 percent off its high in November.

Mr. Stevens said that although consumer price inflation was running at 3 percent in December, the underlying rate was about 3.5 percent, well above the bank’s target of 2 percent to 3 percent.

“Inflation is likely to remain relatively high in the short term,” he said, “and will probably rise further in year-ended terms, before moderating next year in response to slower growth in demand.”

His comments added fuel to market speculation that this would not be the last rate increase this year.

Australia is the world’s largest exporter of coal and iron ore, and despite the slowing American economy, demand for raw materials by China shows little sign of dropping off.

The reserve bank seems to have concluded that for Australia, which is already experiencing significant capacity constraints in terms of labor and infrastructure, the net effect is still likely to be inflationary.

“The world economy is slowing, and it appears likely that global growth will be below trend in 2008,” Mr. Stevens said. “Recent trends in world commodity markets, however, have further strengthened prospects for Australia’s terms of trade.”

In a statement last month, the reserve bank said it expected overall growth of gross domestic product in Australia’s major trading partners to slow from 5 percent in 2007, to 3.75 percent to 4 percent in 2008 and 2009.

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