RBA Raised Cash Rate By 25 Bps. Further Tightening Will Be Implemented 'Gradually'

Inline with expectations, the RBA raised cash rate by +25 bps to 3.5% in November. While acknowledging solid economic growth, the central bank highlighted this month that appreciation in AUD would dampen price pressure and the trade sector. Other comments were similar to what appeared in October's statement.

The RBA increased its policy rate for the second time in 4 months, making it the first central bank to hike interest rate twice in this year. Policymakers' views on economic outlook were broadly unchanged from the prior month. RBA believed that 'the recovery is likely to continue during 2010 and forecasts have been revised higher'. Expansion in major economies is modest while growth in Australia will be boosted by the nation's trading partners. For instance, strong growth in China 'is having a significant impact on other economies in the region and on commodity markets'. Moreover, the job market has shown signs of improvement and the rate of unemployment is now likely to peak at a considerably lower level than earlier expected'.

Concerning general price level, the central bank forecast 'inflation should continue to moderate in the near-term, but now will probably not fall as far as earlier thought … Both CPI and underlying inflation are expected to be consistent with the target in 2010'. We believe the RBA might have underestimated inflationary outlook given recent surge in hose prices.

Attention should be paid on the RBA's warning that 'the rise in the exchange rate is likely to constrain output in the tradable sector and dampen price pressures'. AUDUSD has risen almost +3% since the last meeting and rallied +29% year-to-date. Strength in AUD is probably a reason for the RBA to restrain rate hike.