NEWS - Economy
Published 2:30 PM, 3 Nov 2009
Last update 7:51 PM, 3 Nov 2009
RBA lifts cash rate by 25bps to 3.5%
By a staff reporter, with Reuters/AAP
The Reserve Bank of Australia (RBA) has lifted the official cash rate by 25 basis points to 3.5 per cent, in line with market forecasts and following a similar rise in October.
It was the fourth time in a row the central bank has altered rates on Melbourne Cup day.
"With the risk of serious economic contraction in Australia now having passed, the board’s view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker," RBA governor Glenn Stevens said in a statement following the bank's monetary policy meeting.
"The adjustments at the October and November meetings will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead."
Inflation, which had been flagged as a concern in recent RBA speeches, was expected to moderate in the near term at an underlying level, the RBA said, with both the headline CPI figure and underlying inflation "expected to be consistent with the target in 2010".
While a rise in the exchange rate was likely to dampen price pressures, and constrain output in the tradeables sector, growth was still likely "to be close to trend over the year ahead", Mr Stevens said.
At a global level, Mr Stevens said economic policy settings were likely to remain expansionary for some time and the recovery was likely to continue next year.
In particular, he said prospects for Australia's Asian trading partners appeared "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."
Mr Stevens said economic conditions in Australia had been stronger-than-expected, as measures of confidence recovered, and there were early signs of an improvement in labour market conditions.
It also appeared that private investment would not be as weak as earlier expected and was likely to strengthen in the medium term.
Domestic housing credit growth had also been solid, Mr Stevens said, even though dwelling prices had risen.
Economists tip gradual rises in coming months
JPMorgan economist Helen Kevans said the RBA was highlighting the strength of the global economy and that domestic conditions had proved resilient.
"I think that by the tone of the commentary and the fact the RBA said it's prudent to lessen gradually the stimulus that's been put in place, they're happy to take a steady-as-she-goes approach, and lift monetary policy quite gradually over the next few months," Ms Kevans said.
CommSec chief equities economist Craig James said it was a sensible decision by the central bank.
"Clearly the Reserve Bank did not want to frighten the horses by lifting interest rates by half of one per cent at this time. It is a gradual approach to lifting interest rates," Mr James said.
He said the question now was whether the RBA would move again to lift rates in December.
"It's interesting that the Reserve Bank in its history has never lifted interest rates for three consecutive meetings," Mr James said.
"We believe that the Reserve Bank will hold fire in December, come back in February after it has time to assess the impact of the rate hikes on the economy, and perhaps when it comes back in February we will be lifting rates by 50 basis points at that time."
Macquarie interest rate strategist Rory Robertson said the RBA's statement suggested it was open-minded about skipping a hike in December, before raising rates in February.
"[The statement] mentioned the strength of the exchange rates and used the key word 'gradually' which is taken to mean it will tighten in small steps but not necessarily at every meeting," Mr Robertson said.
Currency to help cap inflation
RBC Capital senior economist Su-Lin Ong noted the board's mention of a stronger Australian dollar, saying it would help the RBA in its struggle to control inflation.
The Australian dollar has appreciated around 46 per cent against the US dollar since slumping to 60.12 US cents on October 28, 2008.
A higher Australian dollar reduces the cost of imported goods and raw materials, while pushing up exported goods prices.
The average underlying inflation rate, which excludes volatile price movements, was 3.5 per cent in the September quarter, above the RBA's target range of two to three per cent.
"It is a roundabout way that the RBA is saying that the currency is doing a bit of the work for them," Ms Ong said.
"I don't think it will do enough of their work and they will continue to lift rates."
Ms Ong still expects the RBA to lift the cash rate by a quarter of a percentage point to 3.75 per cent on December 1.