Fourth Consecutive Interest Rate Hike Likely

Post by Sharat on January 27, 2010 · Under Australian Economy, Business News, Capital Markets, banking, interest rates · Comment 

Inflation is expected to be a key concern for the Australian central bank, the Reserve Bank of Australia is widely tipped to raise interest rates an unprecedented fourth consecutive time.

The December quarter consumer price index, published on Wednesday, is likely to show headline inflation to be up 0.4 per cent, which would take the annual rate to 2 per cent.

Financial markets however will fix their attention on the underlying rate, which many analysts believe increased by 0.6 per cent during the quarter. An increase of that magnitude would moderate the underlying inflation from 3.5 per cent in the September quarter to 3.2 per cent.

Despite the Australian economy somewhat cooling during the global financial crisis, underlying inflation has still remained outside the central bank’s target inflation rate of between 2 to 3 per cent.

Last week a member of the central bank’s board warned that though pressure on inflation has eased, there continued to remain a skill shortage and a national housing bubble.

“The risk is more to cost pressure and inflation than it is to the demand side,” RBA board member Graham Kraehe said.

The central bank is expected to raise official interest rates by 25 basis points when it meets for the first time in 2010 next week in Sydney. An interest rate hike of that size would take official interest rates to 4 per cent.

Financial markets place the probability of an interest hike at 65 per cent, and also suggests that interest rates could be raised as much as 108 basis points during the coming year.

Australia was one of the first countries to begin tightening monetary policy after the crisis, hiking interest rates three consecutive times during the last quarter of 2009.


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