Why did the Reserve Bank of Australia raise interest rates before the global financial crisis hit?

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pohnpei397 eNotes educator| Certified Educator

Over the early months of 2008, the Reserve Bank of Australia increased interest rates twice.  They raised the cash rate from 6.75 to an eventual 7.25%.  The RBA then left the cash rate at 7.25% until it started to cut the rate in September.  Whenever a central bank raises interest rates, it is worried about inflation.  This is why the RBA raised rates.

Early in 2008, the RBA was worried about inflation.  Inflation had been relatively high in 2007 and the RBA wanted to reduce that.  The RBA did predict that the world economy would slow down (though it did not foresee the crash).  However, it felt that aggregate demand in Australia would remain high.  This was, in part, because the RBA believed that demand for Australian commodities, in particular, would continue to increase.  It was also felt that the Australian labor market was tight.  Pressures like these, it was felt, would lead to inflation.

The RBA's purpose, then, was to combat inflationary pressures that were, it felt, likely to affect the Australian economy.