RBA lifts cash rate by 25bps to 3.25%
By a staff reporter, with AAP
The Reserve Bank of Australia (RBA) has lifted the official cash rate by 25 basis points to 3.25 per cent, becoming the first central bank from a major economy to increase its monetary policy setting in the wake of the global financial crisis.
"Economic conditions in Australia have been stronger than expected and measures of confidence have recovered," RBA governor Glenn Stevens said in a statement following the bank's monetary policy meeting.
"With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy.
"This will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead."
Mr Stevens said growth in 2010 was likely to be close to trend, with the global economy resuming growth on expansionary economic policy settings, which were likely to remain in place for some time.
In particular, he said prospects for Australia’s Asian trading partners appeared to be noticeably better.
"Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets," Mr Stevens said.
"For Australia’s trading partner group, growth in 2010 is likely to be close to trend."
Treasurer says rate setting still expansionary
Treasurer Wayne Swan said the RBA's decision to raise the cash rate – its first hike since March 2008 – showed the Australian economy was recovering.
"Australia is outperforming other advanced economies, and I guess many economists will see the decision today as a consequence of economic recovery," Mr Swan said at a press conference following the RBA's meeting.
"I can understand that today's decision makes it tough...(but) few families would be surprised by the decision."
Mr Swan said a 3.25 per cent cash rate setting was still expansionary, with interest rates sitting four per cent below last year's peak.
"Monetary and fiscal stimulus are continuing to support economic activity [and] as the economy recovers, the level of monetary and fiscal support will be gradually withdrawn," he said.
"The government's task is to make sure it gets the fiscal settings right."
Mr Swan said he did not want see banks raise variable mortgage rates by more than 25 basis points, acknowledging some had not fully implemented previous reductions by the RBA.
Homeowners and businesses understood the need for appropriate interest rates, Mr Swan said.
"They do know that 50 year lows can't last forever," he said, adding homeowners had saved a bit while rates were low and could absorb some higher costs as rates rose.
Mr Swan took aim at the opposition saying its likely response would be to blame the government for the rate hike.
"There's no doubt that our political opponents ... will seek to politicise this decision," he said, adding that the opposition's approach to interest rates lacked credibility.
Spending likely to soften in areas receiving stimulus
In the RBA's monetary policy statement, Mr Stevens said some spending was likely to have been brought forward as a result of the government's stimulus package, with demand expected to taper as a result.
However, he said private investment was shaping up to be stronger than originally forecast, with better medium-term prospects.
Mr Stevens said housing credit growth had also been solid, with dwelling prices rising over the past six months.
"For many business borrowers, increases in risk margins will still be occurring for some time yet," he said.
"In addition, the exchange rate has appreciated considerably over the past year, which will dampen pressure on prices and constrain growth in the tradeables sector.
"These factors have been carefully considered by the board."
Nevertheless, the basis for such a low cash rate had now passed, Mr Stevens said.
The cash rate had, until Tuesday, been at its lowest level in 49 years – a level the central bank had previously described as an emergency setting.
Mr Stevens said despite the recent crisis, unemployment had not risen by as much as had been expected.
"The weaker demand for labour over the past year or so nonetheless has seen a moderation in labour costs," he said.
"Helped by this and the earlier fall in energy and commodity prices, inflation has been declining, though measures of underlying inflation remained higher than the target on the latest reading.
"Underlying inflation should continue to moderate in the near term, but now will probably not fall as far as earlier thought."
Economists expect gradual tightening
Macquarie Group interest rate strategist Rory Robertson said the RBA had "widely advertised" a move away from the emergency cash rate setting of three per cent.
"It will be a gradual move from an emergency rate of three per cent, to a still easy four per cent," Mr Robertson said.
"If everything goes well over time, then we could get back to a more normal five per cent in the next year or two.
"It'll be cautious, I think, because it's moved before unemployment has peaked and while full-time employment is falling. We're looking at small steps, depending on the economy."
TD Securities senior strategist Annete Beacher said the RBA's move came as a surprise.
"We were expecting them to move a bit later. Looking through the statement, I suspect the expansion in dwelling prices and housing credit may have seen them moving sooner rather than later," Ms Beacher said.
ICAP chief economist Adam Carr said another 25 basis points rise in November, on the back of the third quarter consumer price index data was an increasingly strong possibility.
"A further 25bps in December is possible if the data comes in on the stronger side – specifically inflation, housing credit and price data," Mr Carr said in the Business Spectator column Scoreboard.
But Mr Carr added that the latter option is far less likely.
ACCI says no justification for rate rise
Prior to the RBA's announcement, the Australian Chamber of Commerce and Industry (ACCI) said there was no justification for an early rate rise, due to the risk of choking a recovery in business confidence.
"We don't want to see an early increase that potentially chokes off the increasing levels of confidence amongst business," ACCI director of economic and industry policy Greg Evans told reporters in Canberra.
"We are still concerned about some potential fundamental weakness in the economy, and overall demand and conditions," Mr Evans said.