Australia Lifts Interest Rate To 3.75% In Third Move

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Tuesday, the Australian central bank hiked its key interest rate for a third straight session in a row.

The Reserve Bank of Australia's Board led by Governor Glenn Stevens raised the overnight cash rate by 25 basis points to 3.75%, in line with expectations.

"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," 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."

The central bank said the Australian economy is in a gradual recovery. Further, the bank expects both CPI and underlying inflation to be consistent with the target in 2010. However, the rate of unemployment is now likely to peak at a considerably lower level than earlier expected, the bank said. Also, the rise in the exchange rate this year will dampen growth in the trade-exposed sector of the economy, the RBA said.

The RBA does not hold a rate setting session in January and the next meeting will be in February.

Economists' Reaction:

J.P. Morgan's Stephen Walters said further tightening also will be gradual.

"The RBA is breaking new ground; this is the first time in the modern era that officials have raised the cash rate three months in a row." "The commentary announcing the decision was balanced - it was an echo of the statement announcing the last rate hike four weeks ago."

"We expect the cash rate to rise steadily rise throughout 2010 albeit, now that the "emergency" component of the policy support is all but gone, at a slower pace than we have observed over the last three months."

"In deciding today to further wind back the policy accommodation", the economist said, "RBA officials are taking the path of least hazard". "They are hiking while they have time on their side and the exit from emergency settings can be orderly." "Policy remains supportive, and will be for some time."

"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 5% by the end of next year. With Australia's economy already at risk of bumping up against the same capacity constraints that blighted the last economic upswing, the RBA probably will be forced to push the policy stance into "restrictive" territory in 2011."

Westpac's Bill Evans said rates remain at least 75 basis points below neutral and the RBA Board's view on the outlook remains almost the same as in November.

"With the next Board meeting scheduled for February 2, the Bank now has ample time to assess the impact of its "material adjustments" before moving again," the economist said. "However, the key point remains that rates are still firmly in the expansionary zone, and not consistent with a central bank which believes that growth is returning to trend while inflation remains above the target band."

"We expect another 25bp rate hike to 4.00% from the Board meeting on February 2."

(Market News Provided by RTTNews)