Third 25-Basis Point Hike This Quarter in Australian Cash Rate

December 1, 2009

The Reserve Bank of Australia Policy Board raised the cash rate to 3.75% from 3.5%.  A solid majority of analysts were expecting this outcome but with less confidence than a week ago.  A statement from the central bank said their November quarterly policy statement’s conclusions and recommendation of a gradual lessening of stimulus remain intact.  Household wealth has recovered “noticeably.”  Credit for housing is “expanding at a solid pace.”  Core inflation is expected to moderate less than expected six months ago.  “Growth next year “is likely to be close to trend and inflation close to target.”  The next policy meeting will not be held until early February, but it will take a significant departure from these conclusions to persuade analysts that a fourth small rate hike will not be implemented then.

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



3 Responses to “Third 25-Basis Point Hike This Quarter in Australian Cash Rate”

  1. berto says:

    Why would the currency react the way it did (by falling) on the rate hike announcement? Personally, I think the USD will remain weak vs the AUD. Isn’t it clear that this is the trend? Plus, one will be able to earn an interest differential of 3.75% in AUD…I would like to know what you think. Thanks for your analyses.

  2. I agree with your logic, but currency markets do not move in lock-step with fundamental economic news. In this instance, a 25-basis point increase had been priced into the market, so you could say this was a buy the expectation, sell on the fact sequence. That’s especially plausible since some read the remark about rate hikes containing future inflation as a signal for a pause in raising rates. I do not and expect another move in February. Sometimes, the market’s reaction is delayed only briefly. Note that today’s markets are being dominated by subsiding fears about fallout from Dubai’s debt difficulties, so the Aussie dollar is at this writing indeed stronger than its New York closing level last night against the greenback, only not to the same extent as the kiwi.

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