Interpac Business and Migration Solutions Melbourne Australia

（2 Mar 2010）Today,  the Reserve Bank has lifted its key interest rate for the first time this year in a move likely to inflict another round of mortgage pain on borrowers across the country.

The major banks said this afternoon their lending rates were under review after the RBA raised its key cash rate by 25 basis points to 4 per cent. The Commonwealth Bank and the ANZ bank were the first to move, matching the RBA rise by lifting their variable mortgage rate by 25 basis points.

Today's increase comes on top of three consecutive months of interest rate rises at the end of 2009 - including one in December when three of the big four banks hiked lending rates more than the RBA.

Australia is among the first countries to begin raising lending rates as the economy rebounds towards levels of growth before the global financial crisis hit in 2008. The central bank indicated that more increases are on the way - potentially unpopular moves in a federal election year.

''The (RBA) Board judges that with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average,'' RBA governor Glenn Stevens said in a statement. ''Today's decision is a further step in that process.''

Federal Treasurer Wayne Swan warned the nation’s banks not to hike mortgages above today’s 25 basis point rise by the RBA, saying there was no justification now that their profit margins had returned to pre-crisis levels.

Recovery signs

The RBA said the risk of  ''serious economic contraction in Australia'' had passed, adding that economic conditions in 2009 had been stronger than expected.

Among the evidence of a rebounding economy, the central bank highlighted ''very strong'' investment in the resources sector while housing credit was expanding ''at a solid pace.''

Dwelling prices, though, ''have risen significantly over the past year'', Mr Stevens said.

Other signs of that recovery include the latest retail sales data - up 1.2 per cent in January to a record $20.15 billion - out earlier today.

Despite the positive assessment of Australia's economy, the RBA said the global recovery is not as certain.

''The expansion is still hesitant in the major countries, due to the continuing legacy of the financial crisis,'' said the Mr Stevens in the RBA statement. ''Credit conditions remain difficult in some major countries as banks continue to face loan losses associated with the period of economic weakness.'' 

And in a likely nod to Greece's budget default fears which have cast a cloud over the financial outlook for the European Union, the RBA said pointedly, ;;Concerns regarding some sovereigns remain elevated.''

What's next

The latest official rate rise is aimed at keeping the economy from excessive growth that might spark higher inflation. The RBA today said ''inflation is expected to be consistent with the target in 2010,'' implying that price rises are not yet a worry for the bank.

Future rate rises will be "one careful step at a time, given the contrast between the extraordinary growth of Asia and the stuck-in-the-mud developed world,'' said Macquarie interest rate strategist Rory Robertson.

After today's verdict, markets are pricing another rate rise in April as a one-in-four chance. In one year's time, the RBA's cash rate will be at least 5 per cent - equivalent to four more typical rate rises - according to Credit Suisse.

Mr Robertson said the strength of the labour market would be a good guide to how fast the Reserve Bank would move on further increases. The unemployment rate has fallen from a peak of 5.8 per cent in October to 5.3 per cent in January, indicating the economy is gathering steam.

JPMorgan economist Stephen Walters said the RBA is likely to pause another month before raising rates again.

''With some of the key uncertainties yet to be resolved, we look for the next hike to the cash rate to come in May, with officials using the intervening two-month period to gauge how quickly the lingering clouds of doubt are clearing,'' Mr Walters said.

''Any convincing evidence that the clouds have darkened, or that it has started to rain, will see the RBA's pause last even longer. Alternatively, a run of unexpectedly firm data could see the RBA deliver a back-to-back hike in April,'' he said.
 
''With officials clearly believing that the policy stance remains easy, every meeting from here is 'live'. Lingering tail risks, however, particularly offshore, suggest there is no immediate rush to hike again.''

Today's rates decision comes a day ahead of the latest national accounts figures. Current predictions are that the economy - as measured by gross domestic product (GDP) - expanded 0.9 per cent in the December quarter alone and 2.4 per cent from a year earlier.

Source: TheAge.com