Australian Cash Rate Lifted 25 Basis Points to 3.5%

November 3, 2009

Monetary officials raised their benchmark interest rate by 25 basis points for a second consecutive month and released a similar statement to the first one, declaring the danger passed of a serious economic contraction and predicting near-trend and near-target inflation over the coming twelve months in spite of some drag from a firmer Aussie dollar.  Since the outlook is not as weak as what had motivated ultra-low interest rates, officials have acted in the name of prudence to “lessen gradually the degree of monetary stimulus.”  More rate hikes are clearly coming.  Officials will meet in December but skip January and not meet again until early February.  By the use of the word “gradually,” it appears to be the Policy Board’s preference is to lift rates in small increments of 25 basis points.  In the last tightening cycle, 300 basis points of increase between May 2002 and March 2008 was achieved entirely through a dozen increases of 25 basis points. Starting from 3%, it might be possible for the Reserve Bank of Australia to get away with such a strategy.  But in the case of central banks with a much lower trough, it will be harder to return to a neutral stance in a sufficiently timely manner without resorting to increments larger than 25 basis points at some point.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



Comments are closed.