This article is from the Australian Property Journal archive
The RBA surprised the market yesterday by unexpectedly raising interest rates by 25 basis points to 4.75% for the seventh time in the tightening cycle after hold rates steady since May this year at 4.50%.
In making the decision, the Board said it decided to tighten interest rates because in the long term the terms of trade and mining investment boom will create inflationary pressures for the Australian economy in the medium term.
Governor Glenn Stephens said over the past month, there has been no significant deterioration in global economies and concerns about the possibility of a larger than expected slowing in Chinese growth have lessened.
He added that whilst sentiment remains fragile, the turmoil in financial markets earlier in the year has also abated.
“Asset values are not moving notably in either direction, and overall credit growth remains quite subdued at this stage notwithstanding evidence of some greater willingness to lend. The exchange rate has risen significantly this year, reflecting the high level of commodity prices and the respective outlooks for monetary policy in Australia and the major countries. This will assist, at the margin, in containing pressure on inflation.
“The demand for labour has continued to firm. While the labour market is not as tight as in 2007 and 2008, some further strengthening would appear to be in prospect, judging by the trends in job vacancies. After the significant decline last year, growth in wages has picked up somewhat, as had been expected. Some further increase is likely over the coming year.
“Given these conditions, the moderation in inflation that has been under way for the past two years is probably now close to ending. Recent information suggests underlying inflation running at about 2½ per cent, with the CPI inflation rate a little higher due mainly to increases in tobacco taxes. Both results were helped somewhat in the latest quarter by unusual softness in food prices. Inflation is likely to rise over the next few years. This outlook, which is largely unchanged from the Bank’s earlier forecasts, assumes some tightening in monetary policy,” Stephens said.
ANZ Bank head of Australian economics Ivan Colhoun said for now, a further move in December seems very unlikely.
“We suspect the market will move to price around 50-75bps of tightening next calendar year,” he added.
Australian Property Journal
