October 6, 2009 / 3:36 AM / 10 years ago

Australia central bank raises rates, more expected

SYDNEY (Reuters) - Australia’s central bank raised its key cash rate by 25 basis points to 3.25 percent on Tuesday and heralded more to come, saying it was safe to row-back on stimulus now that the worst danger for the economy had passed.

A worker walks past the Reserve Bank of Australia (RBA) building in central Sydney October 6, 2009. RBA will announce its latest interest rate decision on Tuesday. REUTERS/Daniel Munoz

The Australian dollar jumped to a 14-month high and interbank futures slid as investors rushed to price in at least one more hike by Christmas, and rates above 4 percent in a year.

Markets elsewhere in Asia also moved to factor in expectations for more hawkish central banks.

The Reserve Bank of Australia’s (RBA) decision made it the first of the Group of 20 central banks to hike as the global financial crisis eases and came as a surprise to many analysts.

Markets, however, had been abuzz with speculation about a move given the strength of recent economic data.

“The RBA had widely advertised it was near to edging up rates from their extraordinary lows, and now it’s done so,” said Rory Robertson, interest rate strategist at Macquarie.

“It will be a gradual move from an emergency rate of 3.0 percent to a still-easy 4 percent,” he added. “If everything goes well over time, then we could get back to a more normal 5 percent in the next year or two.”

It was the RBA’s first increase since March 2008, but only takes back a little of the 425 basis-points of easing delivered when the global credit crisis was in full swing.

Indeed, by any historical measure, policy is still very accommodative in Australia, something noted by RBA Governor Glenn Stevens in his post-meeting statement.

“With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy,” wrote Stevens.


The move by the RBA puts it far ahead of most major developed nations, which show little if any inclination to tighten. Rates in the United States, the euro zone, Britain, Canada and Japan are all at or under 1.0 percent. For a graphic of rates see:


But investors took a different view in some Asian markets. Korean bond futures tumbled, Indian swap rates and yields rose and in Singapore, which has a twice-yearly policy review on Monday, interbank rates fell in preparation for more hawkish leanings from monetary policy makers after the RBA decision.

“This is a surprise move, evidently, and raises the chance that other central banks will follow suit perhaps sooner than anticipated,” HSBC economist Frederic Neumann said in a research note.

“First on the list is Korea and we see a greater chance now of a hike this quarter rather than the next, with Taiwan, perhaps surprisingly, coming next in Asia.”

The RBA’s pre-emptive policy largely reflects the strengths of Australia’s economy, which boasts a sound banking system and strong demand from China for its commodity exports. Australia was the only developed nation to grow in the first half of this year.

That helped Treasurer Wayne Swan sound sanguine on what was be an unpopular move in a country obsessed with home ownership.

“The Australian economy is outperforming other advanced economies and I guess many economists will see the decision today as a consequence of economic recovery,” he told reporters.

So successful has policy been that the RBA had begun to worry about over-stimulating the economy, particularly house prices which have climbed to record highs in recent months.

“We think the tightening has been brought forward as the RBA wishes to lean against potential asset bubbles,” said Annette Beacher, a senior strategist at TD Securities in Singapore.

“House price data will be closely watched by the markets for hints of the pace of further RBA tightening,” she added.

For now, investors were pricing in around a 75 percent chance of a further rise to 3.5 percent in November, and a reasonable probability of rates at 3.75 percent in December.

Overnight indexed swap rates were implying rates of 4.21 percent in one year, up from 4.14 percent before the RBA announcement and 3 percent just a few months ago.

Slideshow (2 Images)

“We’ve got what looks like a gradual tightening process in train, probably by another 25 basis points next month, and then another couple of times early next year,” said Warren Hogan, chief economist at ANZ.

“They will probably get rates up to 4 to 4.25, and then they will pause,” he added. “You may not see rates back to the 5 to 6 percent level until well into 2011.”

Editing by Neil Fullick and Mark Bendeich

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