Interest Rates

During the December Reserve Bank of Australia (RBA) meeting, it was revealed that the official interest rates were raised by 3.75%. This third time rise is an unprecedented event. Such a rise was similarly observed in October and November. The meeting took place on December 2^nd with the cash rate being lifted by 25 basis points.

The minutes of the December RBA meeting stated that: "Members agreed that the level of the cash rate set when the outlook appeared to be much weaker would be too low for an economy that had resumed expanding, with a smaller amount of spare capacity than had earlier been expected."

"That adjustment would not be intended to slow demand compared with the current forecast path, but aimed simply at keeping the stance of policy appropriate for improving economic conditions.''

''In Australia, the downturn was relatively mild, and measures of confidence and business conditions suggest that the economy is in a gradual recovery,'' RBA Governor Glenn Stevens said in a statement accompanying the rates verdict. The central bank's ''gradual'' increases in rates will ''work to increase the sustainability of growth in economic activity,'' he said

The minutes showed that there was heavy discussion as to whether it would be appropriate for the rates to remain level or if there would be increased benefit from another rise. Both sides of the argument were "finely balanced" and many factors were taken into consideration. However, board members came to the decision that, "the stance of monetary policy would best reflect the circumstances facing the economy over the period ahead if there were an increase in the cash rate of 25 basis points at this meeting."

Westpac was the first commercial bank to act upon the rate rise by increasing its key variable home loan lending rate by a surprising 45 basis points.

Interest Rates are predicted to rise again in the New Year, according to many analysts. The findings were found when a poll was taken by Reuters amongst 18 economists with the majority foreseeing that the Reserve Bank of Australia would increase by 25 basis points.

JP Morgan's Chief Economist Stephen Walters commented that it may be witnessed that the RBA make history again by applying four rate rises in a row: "With inflation likely to creep up, and the worst in the economy having passed, there is no need to keep rates at very expansionary levels.''

"We think they will again lift rates in February,'' Mr Walters said. ''The RBA does not meet in January, but I think they will hike when they return after the break. The word 'gradual' is still there in the RBA statement and I think they will start going slow in lifting after February."

As a result of the rate rise, the dollar dropped but later recovered to around 91.5 US cents.

The increase has been met with disapproval from the Australia Retailers Association. Russel Zimmerman, the executive director of ARA, commented that "Instead of letting retail recovery gain some much needed momentum over the Christmas and Post-Christmas trading period, the RBA is taking cash away from consumers at the worst possible time.''

The past interest hikes haven't significantly affected the current economy, with businesses and consumer spending still strong. It's simply a matter of wait and see when it comes to finding out if the economy will fare similarly during the Christmas period.