Tuesday, December 1, 2009

Reserve Bank of Australia Lifts Interest Rates for Third Straight Month

RBA lifts rates for 3rd straight month

17:05 AEST Tue Dec 1 2009
The Reserve Bank
The Reserve Bank raised the cash rate to 3.75 per cent, for an unprecedented third month in a row.

The Reserve Bank of Australia (RBA) has raised interest rates for a third consecutive month, and more increases are expected in 2010 as the economy continues to strengthen, keep inflation under control, economists say.

The RBA on Tuesday raised the overnight cash rate by a quarter of a percentage point to 3.75 per cent, after similar moves in October and November, as it seeks to keep inflation under control during the recovery.

It is the first time the RBA has lifted the cash rate three months in a row since it began announcing its decisions on monetary policy in January 1990.

RBA governor Glenn Stevens said the huge monetary policy stimulus put in place during the global economic downturn - when the cash rate was lowered to three per cent - was being wound back.

"With the risk of serious economic contraction in Australia having passed, the board has moved at recent meetings to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker," Mr Stevens said in a statement.

"These material adjustments to the stance of monetary policy will, in the board's view, work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead."

JP Morgan chief economist Stephen Walters said the RBA was removing the emergency monetary stimulus because the local economy had performed better-than-expected.

"The RBA, therefore, is removing the emergency, or insurance, component of policy accommodation now that the downside risks to the economy have receded," he said.

"Policy remains supportive, and will be for some time.

"RBA officials, though, are pushing the cash rate back towards neutral to mitigate against the emergence of problems, like a house price bubble or credit binge, that could grow larger if the cash rate is left "low for long"."

Mr Stevens said households had gained from recent improvements in equity and housing markets.

"Share markets have recovered significant ground, which, together with higher dwelling prices, has meant a noticeable recovery in household wealth," he said.

RBC Capital Markets senior economist Su-Lin Ong said one of the key differences in Tuesday's statement from the previous one in November was the mention of a recovery in household wealth.

"That is quite key in underpinning activity in going forward," she said.

Ms Ong said the central bank was likely to lift again in the first quarter of 2010 if the economy continued to improve as the RBA expects.

Financial markets are pricing in a 40 per cent chance of the RBA lifting the cash rate by 25 basis points at its next board meeting on February 2. The RBA board does not meet in January.

"We do have another hike pencilled in (February or March 2010) but it is really dependant on the data," Ms Ong said.

Mr Walters expects the RBA to lift the cash rate again in February.

"With little new information revealed by today's commentary, we continue to look for a fourth straight rate hike in early February, and a cash rate target of five per cent by the end of next year," he said.

Nomura Australia chief economist Stephen Roberts said the RBA might wait until March or April.

"It is hinting at a more extensive pause," he said.

"They may go past February and it's looking like March or April now before they (raise rates again)."

All the major banks were reviewing their standard variable mortgage interest rates on Tuesday after Westpac Banking Corporation shocked the market by deciding on a 45 basis point rise in its rate.

Westpac's standard rate will rise to 6.76 per cent from Friday 4.