Michael Knox, Chief Economist and Director of Strategy at ABN AMRO Morgans

The RBA seems to be attempting to increase unemployment in western Sydney in order to decrease demand in Western Australia. Clearly, the last inflation was what caused the decision. Whereas the previous inflation numbers were soft, the last one was high. The net result of that was that inflation wasn’t going up but that it had stopped falling. But the problem is, as we raise interest rates it will generate a higher level of capital inflow, and that will generate a higher level of finance growth. Putting up interest rates when you’ve got a very strong exchange rate tends to be a self defeating process because it generates higher and higher levels of credit growth which you tend to react to by putting up interest rates. We may have started into a cycle which may not end for some time. We’ll find out. In terms of future rate movements, I think the RBA will react to inflation figures. That’s what we need to look for.

Dr Frank Gelber, Chief Economist, BIS Shrapnel

It’s not going to have much impact. Consumer demand is strong, and this might take a little bit of the heat out of it. Jobs are still growing strongly, wages are rising. This is going to be water off a duck’s back. There will be more hardship for mortgagees running pretty close to the line, but why they didn’t fix their mortgages before now I fail to understand. The risk was always rising interest rates, but that’s the thing that can hurt them. What will the RBA achieve as a result of it? Maybe they achieve some expression of taking a hard stance. Maybe they will take a little bit out of the heat of expenditure, but is it expenditure going over the top? Are we going to see a big setback to the economy as a result? The answer is no. Are we going to see a real moderation of inflationary pressure? The answer is no. I don’t think we were going to see one, until the middle of next year anyway, and that’s when you really need to have the gunpowder to raise interest rates. I would have kept my powder dry now waiting for when we really do need it.

Shane Oliver, Head of Investment Strategy & Chief Economist, AMP Capital Investors

There’s no surprise in the move. Perhaps the more interesting comments are in relation to the credit debacle in the US, with the Bank suggesting that situation needs to be kept under review. But the Bank doesn’t regard it as a significant problem at this stage, and that seems to be consistent with the way other central banks are viewing it. The move highlights that inflation is the key here. If inflation heads back down again in the September and December quarters, then I think the Bank will start sounding fairly relaxed about things, and that’s what we think will happen. The chance of another move before the election is zero. Once the election is out of the way, I’d say there’s a 35%-40% chance of another move early next year, and I would expect we would retain that probability throughout next year.

Joshua Williamson, Senior strategist, TD Securities (TD bulletin)

Despite today’s hike by the RBA, TD Securities believes that further policy work needs to be done. Economic and inflation growth is likely to require a second interest rate increase in Q1 of 2008. Even with the dampening influence of today’s increase, the economy will continue to grow strongly. Specifically, domestic demand should remain strong from ongoing wage gains, employment increases and fiscal stimulus in the way of tax cuts and election expenditure. China-based elevation in the terms of trade and an improvement in export volumes will further buoy resource companies, which will continue to feed government revenue and private dividends. Exports should also get a boost with the recovery from the drought. In a strong demand environment, aggregate supply will continue to play catch-up in the short to medium-term and the RBA will want to keep a tight reign on inflation pressures until the investment in infrastructure and productive capital raises productivity and the potential GDP growth rate.