Posted by Gwen Robinson on Dec 01 08:45.
Trust the Aussies to implement one of the most newsworthy yet widely expected interest rate hikes around. The Reserve Bank of Australia on Tuesday raised its benchmark interest rate by a quarter percentage point for an unprecedented third straight month, amid unabated signs of gathering economic strength.
As the FT reports:
Australia’s central bank lifted interest rates for a third consecutive month on Tuesday amid signs that inflationary pressures were building in an economy expected to return to “trend” growth of 3.25 per cent next year.The 25bp rise to 3.75 per cent matches increases in the last two months and is part of the Reserve Bank of Australia’s strategy of weaning the economy off historically low interest rates. The benchmark rate fell to a 49-year low of 3 per cent earlier this year.
The odds of the RBA increasing the benchmark rate on Tuesday had fallen slightly in recent days over fears of contagion resulting from the debt restructuring faced by Dubai World. Not the Aussies.
Apart from the rate hike, there was virtually no change in tone from the RBA’s statement in November and in fact the Bank states [on Tuesday] that the outlook is very similar to then; “so, same-old really”, as Adam Carr at BusinessSpectator notes on Tuesday, continuing:
The Bank didn’t seem too spooked by events in Dubai either, seemingly grouping them in with the occasional “periodic setback” when referring to financial markets. That’s the right way to think about things and they otherwise noted that financial markets have improved considerably in 2009.
Turning to Australia, nothing has changed really. The Bank noted that measures of confidence and business conditions suggest a gradual recovery is underway, fitting in with their forecasts published in November. As I wrote at the time, the RBA’s forecasts weren’t especially aggressive, so there is ample scope for them to continue to be surprised on the upside. Especially with, as the Bank notes, the unemployment rate likely peaking at a much lower level that earlier thought.Indeed, Australia’s outlook is solidly - and unexcitingly - good. As Bloomberg notes on Tuesday:
Australia’s economy expanded 1 percent in the first half of the year and is forecast by the Reserve Bank to grow 3.25 percent next year and in 2011. Third-quarter gross domestic product figures will be published on Dec. 16.
House prices have climbed 10 percent this year, employment rose in October, and companies surveyed by the Bureau of Statistics in a report published on Nov. 25 forecast investment of A$105 billion ($96 billion) in the year ending June 30, 2010, which is 5.9 percent more than they estimated three months earlier…Rising consumer confidence, higher house prices and China’s demand for resources such as iron ore from BHP Billiton are driving a “new upswing” in the economy that will last several years, the bank says.
So, the country appears to be heading into a strong 2010 - which may, or may not, feature further hikes in the first part of the year. As the report noted, Stevens signalled he may now pause, saying the RBA board’s “material adjustments” to borrowing costs are enough to keep inflation within his 2 per cent to 3 per cent target range.
Stevens’s “statement reads as if he feels they’ve done a fair bit of work and can now afford to take time out,” Stephen Roberts, a senior economist at Nomura Australia, told Bloomberg, adding that another rate increase was unlikely before March or April.
Carr’s colleague, Stephen Bartholomeusz, could only say that the RBA’s third consecutive rate rise “ought to be seen as reassuring”:
It would have been easy, and would have been greeted warmly by retailers, had the bank decided to sit on its hands until after Christmas. If its sanguine view of the outlook had proven correct, however, there would have been a potentially more dislocating scramble to raise rates more steeply in the first part of next year.
As it is, he adds, “the bank has stayed on message”:
It has said consistently that it pushed official rates down to the 3 per cent level they reached in April because of the extent of the financial crisis. Those were emergency settings and now that the emergency has receded, it wants to move them back to more neutral levels. That means something that has, at least, a 4 in front of it.
When the RBA next meets in February, it will “have the benefit of some understanding of response to the rise by consumers during the Christmas trading period”, he adds.A pause in the cycle that returns official rates to more conventional settings requires some evidence of economic weakness or vulnerability that isn’t obviously present today. If that evidence arises, of course, the RBA is steadily accumulating more firepower than any other central bank in the developed world to respond to any new threat to stability.
Related links:Australia’s Cup Day rate rise - FT Alphaville
Greenback down, Aussie up - FT Alphaville
Reading the RBA minutes - FT Alphaville
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