INSTANT VIEW: Australia central bank raises rates

SYDNEY (Reuters) - Australia's central bank raised

its key cash rate by 25 basis points to 3.25 percent on

Tuesday, saying it was prudent to gradually take back policy

accommodation since the worst danger for the economy had

passed.

The Reserve Bank of Australia (RBA) announced the decision

in a brief statement following its monthly policy meeting,

making it the first of the G20 central banks to hike.

Markets had been abuzz with speculation about a possible

hike to 3.25 percent on Tuesday after two influential

columnists said a move was likely given the strength of recent

economic data.

KEY POINTS:

- RBA raises its benchmark cash rate to 3.25 percent, from

3.0 percent. It had previously cut by 425 basis points between

September 2008 and April 2009

- RBA statement says prudent to gradually lessen stimulus

from rates

- RBA says growth likely to be closer to trend over the

year ahead, inflation close to its target band of 2 to 3

percent.

- RBA says risk of serious economic contraction has now

passed

- The Reserve Bank's Web site is at: www.rba.gov.au/

COMMENTARY:

BEN POTTER, RESEARCH ANALYST, IG MARKETS

"In our view, the 25 basis points rise from the RBA is both

extraordinary and unnecessary, especially given the RBA clearly

had ample time and scope to delay rate hikes until after

Christmas.

"With government stimulus clearly past its peak and the RBA

suggesting itself there were no present imbalances in the

economy, we cannot fathom the decision, especially considering

the global rhetoric from the recent G20 meeting that it's too

early to begin withdrawing stimulus and normalizing rates."

RORY ROBERTSON, INTEREST RATE STRATEGIST, MACQUARIE

"The RBA had widely advertised it was near to edging up

rates from their extraordinary lows, and now it's done so. It

will be a gradual move from an emergency rate of 3.0 percent,

to a still easy 4 percent.

"If everything goes well over time, then we could get back

to a more normal 5 percent 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."

ANNETTE BEACHER, SENIOR STRATEGIST AT TD SECURITIES,

SINGAPORE

"It has come as a surprise to us as 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."

WARREN HOGAN, HEAD AUSTRALIAN ECONOMICS, ANZ

"I think the reasons are they see the economy at trend and

inflation on target next year. That tells you that their idea

is that policy shouldn't be so far away from neutral.

"We've got what looks like a gradual tightening process in

train. That tells you that the cash rate is likely to be

gradually increased, probably by another 25 basis points next

month, and then another couple of times early next year.

"The key issue is whether they will take the cash rate all

the way back to that 5-6 percent level in the foreseeable

future. There are still a lot of underlying risks and

underlying weaknesses, the rising unemployment rate, credit

growth is still quite soft.

"Our view is that while we do expect the cash rate to get

to 4 percent, it's starting to happen a bit earlier than we

thought. They will probably only get it up to 4-4.25, and they

they will pause. You may not see the rate back to that 5-6

percent level until well into 2011."

STEPHEN WALTERS, CHIEF ECONOMIST, JPMORGAN

"It's just prudent to get the rate hike out there early

rather than wait any longer and risk having to tighten more

aggressively.

"We suspect this is the first of many, but they are going

to go slowly. I think they're going to go a quarter of a point

every couple of months or so. Even then, we are still very

accommodative. We are not going to tight zone for a long time.

"They will probably wait till December to see how consumers

in particular withstand this rate hike. There is no rush here."

STEPHEN ROBERTS, ECONOMIST, NOMURA

"It was a bit of a shock. Now that they've done it, they

will start slowly normalizing rates. The whole tenor of the

statement was more upbeat this time round, and so it will

probably be followed by another 25 basis points next month. At

this point, I think they will still move cautiously, at 25

basis points.

"It's hard to say how far they will go but at some point,

rates should be at 4 percent next year."

MARKET REACTION:

- The Australian dollar jumped over half a cent to

around $0.8840 after the news. Bill futures slipped as

the market priced in at least one more hike before Christmas.

BACKGROUND:

- In a Reuters poll on Friday, 19 of 21 analysts had

forecast a steady rate of 3.0 pct, with two looking for a hike

to 3.25 pct.

- However, the odds narrowed sharply on Monday after two

influential columnists wrote that a hike on Tuesday now looked

likely given the surprising strength of the economy.

- Many thought the RBA would hold off until November at the

earliest to assess more data, including the consumer price

report for the third quarter due later this month.

- But a run of upbeat data on household spending,

employment and, especially, house prices suggest the RBA was

becoming impatient with keeping rates at an "emergency" level

of 3.0 pct.

- So successful has policy been that RBA Governor Glenn

Stevens last week said the unusually low cash rate would have

to be raised in a timely manner to avoid over-stimulating parts

of the economy.

- The hike makes Australia the first of the G20 to move and

the second developed nation after Israel to start unwinding the

extraordinary stimulus of the global credit crisis.

(Reporting by Sydney newsroom, editing by Jonathan Standing)