Interest rate rise on track despite contraction in economy

THE RBA is on track to raise interest rates within months despite the economy suffering its worst contraction in 20 years.

THE Australian economy has suffered its worst contraction in 20 years but a surge in business investment will provide the next stage of growth and keep the Reserve Bank on track to raise interest rates in the next few months.

The March quarter national accounts, published yesterday, show the economy shrank by 1.2 per cent after the Queensland floods and Cyclone Yasi dragged the economy into the red, The Australian reports.

The most damage was caused by a 27 per cent fall in coal exports, and the floods shaved 1.5 to 2 per cent off growth in the quarter.

The result was just the fourth contraction in the past 20 years and the worst since the peak of the 1991 recession. However the result surpassed expectations that the economy could shrink by up to 1.4 per cent.

It prompted the dollar to rise to $US1.0732 before falling to $US1.0722. Last night, the currency was higher at $US1.0742.

There was speculation yesterday that a Latin American central bank was buying the Australian dollar to diversify out of its greenback holdings. The Australian dollar has become one of the most bought currencies in the world by central banks.

The Australian equities markets showed little reaction, with the S&P/ASX 200 and the All Ordinaries finishing flat.

Read more on this story at The Australian.