Rates rise but no surprise
03 Dec 09
Rates rise but no surprise
As widely tipped, the central bank lifted its key cash rate by 25 basis points for an unprecedented third time in as many months to 3.75 per cent following its monthly board meeting.
''In Australia, the downturn was relatively mild, and measures of confidence and business conditions suggest that the economy is in a gradual recovery,'' RBA Governor Glenn Stevens said in a statement accompanying the rates verdict. The central bank's ''gradual'' increases in rates will ''work to increase the sustainability of growth in economic activity,'' he said.
Reserve Bank officials have made regular public comments in recent weeks that it sees no need to keep interest rates at ''emergency'' levels as the economy rebounds from a slowdown during the past year. Ric Battelino, the RBA's deputy governor, last week said the economy's growth is likely to extend ''for a few more years yet.''
More rises to come
Still, the economic data continue to provide mixed readings. A measure of manufacturing activity in November out today showed the sector continues to grow with companies adding jobs, although the stronger Australian dollar slowed the pace of expansion.
Overall building approvals, meanwhile, surprisingly fell 0.6 per cent in October, according to other figures out today. A 5 per cent gain in approvals for private homes was countered by a 19 per cent drop in permits for flats and townhouses.
Even with today's rate increase, the Reserve Bank's efforts to tighten monetary policy are likely to be far from over.
''The big change in this statement was their reference to the increases so far as being material,'' ANZ's head of Australian economics Warren Hogan told Reuters.
''I read that as implying that they're ready to now sit back and watch how these increases affect the economy. And the hurdle for further rate hikes will be much higher than we have seen so far.
"So I think our view that they're going to 4 (per cent), 4.25 then sit there for much of the year is the right one. There's every chance they'll do it in February and March, although I wouldn't be surprised if it's dragged out over a number of months."
JP Morgan's Chief Economist Stephen Walters agreed that the RBA may make it four rate rises in a row: "With inflation likely to creep up, and the worst in the economy having passed, there is no need to keep rates at very expansionary levels.''
"We think they will again lift rates in February,'' Mr Walters said. ''The RBA does not meet in January, but I think they will hike when they return after the break. The word 'gradual' is still there in the RBA statement and I think they will start going slow in lifting after February."
Before today's move, investors were betting that rates would rise to at least 4.75 per cent in a year's time - equivalent to four more rate rises over the period. Three weeks ago, however, the betting was for rates to rise to 5.25 per cent, indicating confidence in the economy's strength has recently diminished.