INSTANT VIEW 5-Australia c.bank raises rates to 3.5 pct

Published: 02 Nov 2009 21:09:20 PST

SYDNEY, Nov 3 - Australia's central bank raised its key cash rate by 25 basis points to 3.50 percent on Tuesday, again saying it was prudent to gradually lessen stimulus given the economy's surprising resilience.

The Reserve Bank of Australia (RBA) announced the decision in a brief statement after its monthly policy meeting. It was the second hike in as many months and markets expect a drum roll of further small moves in the months to come. ****************************************************************

KEY POINTS:

- RBA raises its benchmark cash rate to 3.5 percent, from 3.25 percent, hiking for a second straight month.

- RBA statement repeats prudent to gradually lessen stimulus as the risk of a serious economic contraction has passed.

- RBA says growth likely to be closer to trend over the year ahead, inflation close to its target band of 2 to 3 percent. - Text of the statement can be found on <RBA01> or [ID:nRBA]

- The Reserve Bank's Web site is at: http://www.rba.gov.au/

COMMENTARY:

PETER JOLLY, HEAD OF RESEARCH, NATIONAL AUSTRALIA BANK

"It's neither hawkish nor bearish and it's little changed from October. It's consistent with their stance that they will gradually unwind the monetary stimulus. So the RBA is on a steady path to lift rates by 25 basis points in December.

"Perhaps the market was a bit disappointed because some people were hoping for a 50-basis-point hike and a more hawkish statement."

DAVID DE GARIS, SENIOR ECONOMIST, NATIONAL AUSTRALIA BANK

"It is a pretty balanced statement, we'd been warned that they had upgraded their growth and inflation forecasts, but they are still using the term of gradually removing that stimulus. The language that they are using is very much in the strategy of the October rate rise, that is 25 basis point moves at this time. They don't want to upset confidence.

"I think they will continue on that path for the time being. They are probably going to be pushing rates up to around 4 and 4.25 percent. We think we will probably see another 25 points in December and another one or two more in the New Year and then take a pause.

"There doesn't seem to be any urgency in the statement that they need to push on any faster than that at this point in time. Next year is another ball game."

RORY ROBERTSON, INTEREST RATE STRATEGIST, MACQUARIE

"The statement suggested the RBA was open minded about skipping a hike in December, and then going in February. It mentioned the strength of the exchange rates and used the key word 'gradually' which is taken to mean it will tighten in small steps but not necessarily at every meeting. Overall, as long as the economy keeps doing well, they will keep tightening, to 4 percent, 5 percent and beyond."

SU-LIN ONG, SENIOR ECONOMIST AT RBC CAPITAL

"The 25 basis point (hike) was expected. But what is new in this statement is some acknowledgment that the rising currency is doing some of the RBA's job. The markets have taken it as the RBA may not have to tighten as much as feared. So bills and bond futures are both up. Whether they will go again in December, having already gone twice, is difficult to say. We think there is a good chance for that happening."

MICHAEL BLYTHE, CHIEF ECONOMIST, CBA

"They've delivered pretty much what we thought. The statement reads very similar to other recent commentary out of the bank, things are better than they thought and super expansionary policy is no longer required.

"We're getting mixed signals on the speed of when they're going to take out that emergency component, because after saying holding rates low for too long would be imprudent, we're now back to gradual tightening.

"But if the economy continues as it is you'd have to think that we'll be lining up this time next month for another go."

HELEN KEVANS, ECONOMIST, JP MORGAN

"The commentary was much as we expected, the RBA is highlighting the strength of the global economy and that domestic conditions have definitely proved resilient."

"I think that by the tone of the commentary and the fact the RBA said it's prudent to lessen gradually the stimulus that's been put in place, they're happy to take a steady-as-she-goes approach, and lift monetary policy quite gradually over the next few months."

CRAIG JAMES, CHIEF EQUITIES ECONOMIST, COMMSEC

"I think it is a sensible decision by the Reserve Bank. Clearly the Reserve Bank did not want to frighten the horses by lifting interest rates by half of one percent at this time. It is a gradual approach to lifting interest rates. The question now comes to the December meeting: are we going to see a rate hike in December or not? It's interesting that the Reserve Bank in its history has never lifted interest rates for three consecutive meetings. We believe that the Reserve Bank will hold fire in December, come back in February after it has time to assess the impact of the rate hikes on the economy, and perhaps when it comes back in February we will be lifting rates by 50 basis points at that time."

MARKET REACTION:

- The Australian dollar <AUD=> slipped after the move, which was much as expected. Bill futures <0#YBA:> firmed as there had been speculation the central bank could tighten by a more aggressive 50 basis points.

BACKGROUND:

- The RBA last month became the first central bank in the G20 to raise interest rates since the global financial crisis turned to nascent recovery, reflecting the country's relative economic resilience.

- Aggressive fiscal and monetary stimulus, a stable banking system and strong demand for Australia's commodity exports from China and much of the rest of Asia.

- In a Reuters poll on Friday, all 20 analysts had expected a rise in rates, 16 tipping a move of 25 basis points and four a more aggressive 50 basis points.

- The market was fully priced for a move to 3.50 percent as strength in economic data, notably employment and house prices, supported the RBA's argument that exceptionally low rates were no longer needed.

- Some thought the central bank could surprise with a larger move of half a point, though there have been no leaks in the press suggesting it was unhappy with market pricing of 25 bps.

- The market is also pricing in a real chance of another 25 basis points in December and total tightening of around 200 basis points over the next 12 months.