The Reserve Bank has lifted interest rates for a record third month in a row, with the cash rate being raised 0.25% to 3.75% after the last board meeting for 2009 this morning.

The news was anticipated, although there was less confidence among some analysts and economists about this rate rise than about the increases in October and November.

It continues the move by the RBA to return monetary policy to a more normal footing where rates are set to try and reflect a growing economy and its strains and pains, not cushion the impact of a sharp (and dangerous) slump in activity that was feared a year ago in the wake of the Lehman Brothers failure and the implosion of global financial markets, banks, world trade and the most major economies.

Judging from the post-meeting statement this afternoon from RBA Governor Glenn Stevens, the rise won’t be the last and the timing remains a month to month proposition, depending heavily on the normal flow of data on things like retail sales, employment, building approvals, investment etc.

Now the central bank has December and January to wait before there’s another chance at the first meeting for 2010 in early February, with the September quarter economic growth numbers a major part of that with their release in two week’s time tomorrow.

Earlier today the October building approvals showed a 0.6% fall for the month, driven down by another sharp fall in non-private dwelling approvals as developers again found it hard to get finance for their projects. but private home approvals were up for the 120 month in a row  with a solid 5% increase recorded.

Along with another rise in house prices in October, according to RPData/Rismark, the RBA had more evidence that the economy, especially property is growing very solidly, and perhaps needed another nudge from a rate rise.

Mr Stevens finished the statement with this final paragraph (which is the key to understanding each statement).

“With the risk of serious economic contraction in Australia having passed, the Board has moved at recent meetings to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker.

“These material adjustments to the stance of monetary policy will, in the Board’s view, work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.”

That leaves the question of future rate rises completely up in the air and maintains the ‘normalisation’ of monetary policy since it became very apparent in August-and September that Australia has missed the worst of the global slump and crunch.

The RBA said “measures of confidence and business conditions suggest that the economy is in a gradual recovery.”

“The effects of the early stages of the fiscal stimulus on consumer demand are fading, but public infrastructure spending is starting to provide more impetus to demand. Prospects for ongoing expansion of private demand, including business investment, have been strengthening.

“There have been some early signs of an improvement in labour market conditions. The rate of unemployment is now likely to peak at a considerably lower level than earlier expected.”

“Share markets have recovered significant ground, which, together with higher dwelling prices, has meant a noticeable recovery in household wealth”

All these are the traditional check points for the central bank, along with inflation and the currency.

There Mr Stevens said:

Inflation has declined from its peak last year, helped by the fall in commodity prices at the end of 2008 and a noticeable slowing in private-sector labour costs during 2009. In underlying terms, inflation should continue to moderate in the near term, though it will probably not fall as far as thought likely six months ago.

Headline CPI inflation on a year-ended basis has been unusually low because of temporary factors, and will probably rise somewhat over the coming year. Both CPI and underlying inflation are expected to be consistent with the target in 2010.

The rise in the exchange rate during this year will have some impact in containing prices for traded goods and services in the period ahead, and will dampen growth in the trade-exposed sector of the economy.

In other words the RBA sees no reason to maintain rates at abnormally low levels (historically) for the Australian economy and its time to lift them back to a neutral stance instead of the highly accommodating stance since late last year.

That means rates have at least 0.75% to 1.25% to rise over the next year, according to most guesses from the market.

Peter Fray

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