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Interesting article from Gavin
Well the title of the article is clear enough - the RBA has lifted the cash rate by 25 basis points in the first move away from their emergency cash rate level of 3% despite inflation remaining at 1.5% - well under the RBA's target range of 2 to 3%. The rise has been prompted by a stronger than expected performance in the unemployment rates, stronger retail sales, rising consumer confidence levels and a rebound in the sharemarket** (which is up 50% from its lows). Additionally, the strong performance of the housing market has also prompted a move by the RBA to control what many fear may turn into a housing bubble. Australia well and truly remains the most robust of all developed economies.
This pre-emptive move has also been due to the stronger than expected performance of our trading partners in China, India and other Asian nations. While China's central bankers and policy makers haven't really responded any differently than anyone else in the world, (ie. they are spending like crazy!) the key difference is that they have cash... and LOTS of it. The benefits of this has indirectly flowed into our economy in the form of high commodities prices and export volumes. This is really the key difference that sets us apart from virtually all othe developed economis - small population, big land mass, strategic location near Asia and a heaps of valuable dirt.
Clearly Glenn Stevens thinks that we are well on our way to recovery.
This increase in rates stands in stark contrast to other developed economies. It is likely to increase demand for Australian dollars and attract foreign money flows into this country. We can expect the Aussie dollar to strengthen against the USD.
In part this will be due to USD weakness as the creditor nations of the world become increasingly nervous about their USD holdings, rather than the inherent stength of the AUD alone. If China chooses to maintain its US dollar peg, which is highly likely, this will present itself in the form of lower (officially recorded) inflation levels for us.
Well, the rates are still well in a stimulatory range. As we have mentioned before, rates are unlikely to shoot up very fast due to the highly leveraged nature of our household sector and for the most part, those who remain on variable rates should hold their nerve and avoid fixing for now. We can expect a cautious, wait and see approach by the RBA rather than any quick movements as the recovery for the global economy is likely far less certain than suggested by most mainstream commentators.
In the meantime, property prices are likely to continue ticking upwards across the board with excellent opportunities being presented in isolated markets which will show greater than average returns.
Head of Research
** it is impossible to ignore the fact that the recent rebound inthe sharemarkets (globally) have effectively been a result of forced speculation due to the twin threat of inflation (monetary debasement) and low interest rates available in cash investments. While many stocks were deeply oversold and represented good buying last year, a rebound based purely on money flows rather than the weight of productive activity is unlikley to be durable... the so called suckers rally.
RBA lifts rates
October 6, 2009 - 2:52PM
The Reserve Bank has raised its key interest rate, making Australia the first developed nation to reverse the cycle of cuts triggered by the global financial crisis. Analysts say more increases are on the way.
Today's 25-basis-point rise pushes the central bank's cash rate to 3.25 per cent and will add $40 to the average monthly payment for a typical $300,000 mortgage if passed on by commercial banks. The extra cost may stretch household budgets at a time when unemployment remains on the way up.
''Economic conditions in Australia have been stronger than expected and measures of confidence have recovered,'' Glenn Stevens, governor of the RBA said in a statement accompanying the rate increase. ''[The] basis for such a low interest rate setting has now passed,'' he said.
''I think it's pretty clear that (the RBA is) increasingly comfortable that growth outlook appears durable,'' said RBC Capital Markets economist Su-Lin Ong.
''They talk about a return to close-to-trend growth in the year ahead so obviously Australia is proving resilient throughout all of this.''
The Australian dollar jumped on the rate news, adding more than three-quarters of a US cent to 88.45 US cents, nearing 14 month highs - before easing back slightly. Stocks, though, fell, trimming the day's gains.
Investors are rating the chance of another rate rise when the RBA board next meets at 40 per cent. In one year's time, rates will be up to 5.25 per cent - implying eight more quarter-point increases by then.
Today's rate hike - the first shift in either direction since April, when rates were reduced to 3 per cent, and the first increase since March 2008 - is the surest sign yet that the local economy is on the mend.
The RBA has been emboldened by strong retail sales, rising consumer confidence and a rebound on share markets worldwide, which are up 50 per cent in Australia alone since March.
''The global economy is resuming growth,'' Mr Stevens said. ''With economic policy settings likely to remain expansionary for some time, the recovery will likely continue during 2010 and forecasts are being revised higher.''
While the expansion is likely to be ''modest'' for many rich nations, ''[p]rospects for Australia's Asian trading partners appear to be noticeably better,'' Mr Stevens said. ''Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets.''
The central bank does not want the economy's overall health to be threatened by underlying inflation or unsustainable borrowing activity, which can be triggered by low rates.
''For the health of the Aussie economy and the sustainability of the recovery I hope they do a few more (rate rises) because inflation is still going to be a problem,'' said ICAP economist Adam Carr.
''Our economy is going to be running on all cylinders next year and that could be a problem.''
The RBA's Mr Stevens, though, said inflation is likely to be ''close to target,'' with the stronger Aussie dollar helping to ease some price pressures as imports become cheaper.
And the bank is worried about the effect of unchecked house prices rises, which analysts say received an unintended boost from the First Home Buyer's Grant.
Those financial incentives for home buyers, put into place a year ago at the height of the economic crisis, were cut from last week and will be cut again at the end of the year.
Despite the positive economic signs, the job market remains weak, with the unemployment rate, currently at 5.8 per cent, expected to have hit 6 per cent in September when new data is revealed on Thursday.
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