Fourth Rate Hike in Australia, 25 Bps to 4.0%

March 2, 2010

Having been the first G-20 nation last October 6 to see a rate hike after the global financial crisis, Australia became the first economy anywhere to undergo a fourth increase.  All of them — one each in October, November and December — were by 25 basis points.  Most analysts, myself included, expected today’s move as several hints had been dropped by officials, and economic data seemed to justify further tightening.  The central bank had paused at its February meeting (there was no meeting in January) because of the uncertain fallout of Europe’s fiscal woes.  During the crisis, 425 basis points of easing had been implemented, starting and culminating with 25-bp moves in September 2008 and April 2009.  In between, there had been reductions of 100 bps each in October, December and February and of 75 bps in November 2008.

In typically candid terms, today’s statement released by the Reserve Bank of Australia declares that with “growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average.  Today’s decision is a further step in that process.”  Officials apparently believe the process can be accomplished in small increments of 25 basis points.  Australia has some advantages over other central banks in this regard:

  • Rate tightening started earlier.  Even at 3.75%, officials no longer considered their stance exceptionally accommodative.
  • Business sector de-leveraging is moderating but not completed.  Although financial markets are functioning better everywhere, a legacy of the crisis is that lower central bank rates will correspond to the same restraint as higher rate levels before mid-2007. One RBA officials had suggested a few months ago that a 3.75% cash rate now is like a 4.75% level before.
  • RBA policymakers meet monthly, not eight times a year like the Fed, and thus have more opportunities to act.  25 bps per quarter might suffice.
  • The Aussie dollar is firm but has stalled around 90 U.S. cents.
  • A recent firming of inflation reflects temporary factors.  In-target, but not above-target, inflation is predicted in 2010.
  • Rate increases taken already, though just 25 bps in size, seem to be tempering mortgage demand.  Building approvals unexpectedly slumped 7.0% between December and January.

Monetary officials continue to feel good about the Australian economy.  The downturn was less pronounced than feared, and growth seems to be back at Australia’s long-term trend.  The area of greatest frothiness is Australia’s labor market.  For now, tightening by 25 basis points a shot with occasional pauses is the favored strategy of policymakers.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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