It’s back to situation normal for the Australian economy with the Reserve Bank starting a series of rate rises that will take the cash rate back towards 5%.
The central bank wants to move out of ’emergency’ rate territory into something less dramatic which also reflects the improvement in the Australian economy.
The RBA lifted its cash rate 0.25% to 3.25% and became the second major central bank after the Bank of Israel to end a campaign of emergency rate cuts to combat the impact of the credit crunch and the recession.
It was the first rate rise since March 2008 and won’t be the last.
The news saw the Aussie dollar surge to new 14 month highs, peaking around 89.20 US cents in offshore trading overnight Wednesday.
The rise clipped the benefits to gold miners from a record gold price of around $US1057 (Midday in New York Tuesday) an ounce which came as the US dollar fell (thanks in part to the Australian rate rise) and talk of a move out of the currency by some oil producers. That was denied.
The RBA’s move followed one from the Bank of Israel which lifted its key rate in August by 0.25% to 0.75%, showing how damaged that economy remains.
Yesterday the RBA followed with the increase to apply from today.
Major banks will start revealing their rate decisions today.
The RBA’s increase had been expected by some analysts, such as Rory Robertson of Macquarie Banks, while others had expected it in November.
Mr Robertson said after the rate rise decision that if "the Australian economy continues to strengthen- in particular, if the downward trend in full-time employment tends to stabilise and then reverse-we can expect the RBA over an extended period to move through its various policy settings from "emergency (3%) towards "easy" (4%) and then "neutral" (5% or so).
"Restrictive (6% plus) will come much later on if things go really well over the years," Mr Robertson said.
The National Australia Bank’s chief economist, Alan Oster said in a statement:
"Our reading of the RBA press release announcing a 25 point rate rise is that the RBA now sees themselves in a process of moving the cash rate up progressively over coming months.
"We had expected them to start in November and move up 25 points in each of the next 3 meetings.
"While the RBA has started earlier than we expected we see nothing to change our expectation of a series of two additional rate rises in successive meetings. Hence we have the RBA cash rate at 3.75 by year end.
"We still expect the RBA to then pause for around 6 months to assess what happens and then move up around 50 points. A similar process is then likely, moving the rate to 4¼% by end 2010 and 5½% by mid 2011. That would return the cash rate to what they think is roughly neutral,’ he said.
It was a decision that started reversing the quick fire 4.25% of rate cuts from the central bank which started in September 2008 and finished in April of this year.
"In late 2008 and early 2009, the cash rate was lowered quickly, to a very low level, in expectation of very weak economic conditions and a recognition that considerable downside risks existed," RBA Governor, Glenn Stevens said at the end of the post board meeting statement issued at 2.30 pm.
"That basis for such a low interest rate setting has now passed, however."
"With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy.
"This will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead."
The central bank revealed that it had considered the rises in risk margins, fixed home loan rates and the impact of the higher Australian dollar on prices in reaching its decision.
Some analysts say these have already added a quarter of a per cent or more to rates for small, medium and large businesses and some home loan borrowers are now paying.
"Interest rates facing prospective borrowers on fixed-rate loans have already risen to some extent, as markets have anticipated a higher level of the cash rate,” Mr Stevens said.
"For many business borrowers, increases in risk margins will still be occurring for some time yet.
"In addition, the exchange rate has appreciated considerably over the past year, which will dampen pressure on prices and constrain growth in the tradeables sector.
"These factors have been carefully considered by the Board.
"Unemployment has not risen as far as had been expected. The weaker demand for labour over the past year or so nonetheless has seen a moderation in labour costs.
"Helped by this and the earlier fall in energy and commodity prices, inflation has been declining, though measures of underlying inflation remained higher than the target on the latest reading.
"Underlying inflation should continue to moderate in the near term, but now will probably not fall as far as earlier thought.
"Housing credit growth has been solid and dwelling prices have risen appreciably over the past six months.
"Business borrowing has been declining, as companies have sought to reduce leverage in an environment of tighter lending standards.
"But large firms have had good access to equity capital and access to debt markets appears to be improving, helped by the better-than-expected economic conditions and increased
