Tuesday, November 03, 2009

Second RBA Rate Hike

The Reserve Bank of Australia today became the first central bank since the beginning of the financial crisis to raise short-term rates twice. The central banks in Israel and Norway have each done it once, but the RBA is the only central bank that has done it two times. Short term rates in Australia now stands at 3.5%, still historically low for Australia but much higher than in most other countries.

Australia's economy is a lot stronger than most other economies, with increasing employment and rising house prices. The recovery in Asia has helped increase the prices of Australia's commodity exports.

Ironically, the dramatic 29% appreciation of the Australian dollar against the U.S. dollar this year has been partly based on expectations of these and more rate hikes, yet at the same time the currency appreciation is reducing the odds of such hikes, as lower import and export prices will reduce consumer price inflation, something which will reduce the RBA's willingness to raise rates. The more rate hikes the markets expect and price in, the less rate hikes will there actually be, in what one could call a self-preventing prophecy.