RBA unexpectedly hikes rates

The Reserve Bank of Australia (RBA) today lifted the cash rate another 25 basis points to 4.75% which was unexpected as a hike was not forecast by most till December.

Tuesday, November 2nd 2010, 9:29AM

by BusinessDesk

J P Morgan says the statement announcing the decision hints that this was another close call, with the decision to hike triggered by a shift in the balance of risks around a number of key variables.

This shift was sufficient, though, for the Board to believe the time had come for members to be "prudent", and for them to move "early".

"Last month, when the Bank unexpectedly left the cash rate steady, officials believed there was enough "flexibility" for them to await further information. Not any more."

J P Morgan suspects this will be the last hike this year, with the commercial banks likely to do the rest of the immediate work for the Bank by lifting their variable home mortgage rates at least 35 basis points in the days ahead.

Governor Glenn Stevens said Australia's economy "is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity," with the moderation in inflation over the past couple of years "now close to ending."

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia said "Most of Australia's on holiday - I can't believe they did it on Melbourne Cup day and not in October - if you have money parked in Australasia, it's going to be in the Aussie."

Investors flocked to the Australian dollar after the announcement, which jumped 1 US cent to 99.74 US cents, while the kiwi dollar sank 1 Australian cent to 76.58 Australian cents.

Kelleher said the Australian dollar will probably have a crack at parity with the greenback during the Northern Hemisphere session. It briefly broke through the barrier early last month.

The surprise decision comes a month after Stevens unexpectedly kept rates on hold in October, and follows benign inflation data that was expected to keep the bank from firing the trigger after five months of pauses.

The hike has traders reassessing their track for Australian interest rates, with the market pricing in a further 62 basis points of increases by the RBA, according to the Overnight Index Swap curve. That's up from 44 points earlier today, and keeps the yield advantage in Australia's favour, with traders forecasting New Zealand's central bank to lift rates by 78 basis points over the same period.

The Reserve Bank of New Zealand held the official cash rate at 3% last week, though Governor Alan Bollard said monetary policy will have to tighten at some stage in the future.

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