RBA’s rationale for rate rise on 3 November 2009
The Reserve Bank of Australia has lifted the cash rate by 25 basis points on Melbourne Cup Day 2009, the second 25 basis points increase in as many months.
The rationale put forward by Governor Glenn Stevens is “the risk of serious economic contraction in Australia now having passed, the board’s view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker”.
Economic growth is likely to be close to trend over the next 12 months while inflation should remain within the bank’s 2 – 3 % target range. The decision yesterday is seen as part of RBA’s efforts to “normalise” the official cash rate which, after this second rate rise, is still at a 44-year low and consumers need to realise that Australia’s economy is performing much better compared to all other industralised nations in the world such as the UK, USA, Japan and most European countries.
Therefore, the RBA’s actions yesterday was merely to gradually lift the cash rate which was deemed to be at “emergency levels” to a point which is more representative of the state of the economy. The RBA is still cautious and will continue to monitor the state of the economy to determine its course of action for the official cash rate in December 2009. In the event there is a reprieve, then the RBA will only meet again in February 2010.
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