RBA hikes rates for third straight month while noting 'relatively mild' downturn

Tuesday 1st December 2009

The Reserve Bank of Australia has hiked interest rates for a third month in a row after the so-called “lucky country” experienced a “relatively mild” downturn in the wake of the global financial crisis.

Governor Glenn Stevens raised Australia’s target cash rate 25 basis points to 3.75%, saying the economy is growing gradually. Still, public infrastructure spending is underpinning demand even as the impact of the federal government’s fiscal stimulus fades.

Markets were less sure of a rate hike after the investment company Dubai World said it would apply to defer its debt repayments, and damped global optimism about the pace of economic recovery.

“The RBA clearly took advantage of the fact that markets had largely expected a rate hike,” said Ben Potter, research analyst at IG Markets in Melbourne. “Had markets seen a December rate hike as less than even chance the RBA probably would have held steady, particularly as the need for a third consecutive hike was highly debatable.”

Australia became the first G-20 nation to begin tightening monetary policy after its economy avoided a recession as Chinese demand for raw materials propped up the metal-producing nation.

Stevens said the “risk of serious economic contraction in Australia” has passed, though the central bank will continue to “gradually” remove its monetary stimulus. Australia’s central bank won’t meet until February next year.

The rate hike has widened the interest rate differential between the trans-Tasman neighbours, where New Zealand’s central bank Governor Alan Bollard has repeatedly said interest rates will remain at their current record-low levels until the second half of 2010.

The New Zealand Institute of Economic Research today said it doesn’t expect interest rates to rise in New Zealand until the September quarter as the removal of fiscal stimulus will allow Bollard to keep rates at their depressed level.

Businesswire.co.nz

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