Australia's central bank raised interest rates for a record third successive month today, pulling further back from emergency lows as the economy gallops ahead of its peers in the developed world.
The Reserve Bank of Australia (RBA) lifted the key cash rate 25 basis points to 3.75 per cent and called its three hikes a material adjustment, but offered no guidance for further moves.
Interbank futures continued to price in a string of rises toward 4.5 per cent by June, with only the pace of the tightening in doubt.
"The one difference is the mention that the adjustment of rates is material," said David de Garis, a senior economist at National Australia Bank. "This may suggest they are closer to the initial resting point."
Yet, on balance, he felt they would tighten in February and March given the strength of the economy and the still low level of rates. The RBA has no policy meeting in January.
RBA governor Glenn Stevens has repeatedly stated that he only slashed rates so low for fear of an economic crisis and now the economy is recovering, such stimulus is no longer needed.
"Three hikes in three months doesn't seem so gradual," noted Brian Redican, a senior economist at Macquarie.
"Going by their actions, this is a central bank that thinks rates are too low and is intent to get them up," he added. "People will likely expect another move in February."
February interbank futures were implying a one-month rate of 3.87 per cent, or about a 50:50 chance of an increase. The Australian dollar was a shade lower at $0.9150 but well supported by the diverging outlook for policy here and abroad.
Rates in major developed nations seem set to stay at record lows for months to come. The Bank of Japan on Tuesday surprised by calling an extraordinary policy meeting, where it was expected to discuss more exceptional easing steps.
The Australian economy has surprised everyone with its resilience this year, growing even while the developed world slid deeper into recession. Aggressive stimulus, a stable banking system and Asian demand for its commodity exports have all helped insulate the country.
Indeed, the RBA believes the rise of China and India, and their ever-expanding appetite for coal, iron ore and energy, will lead to a golden era of prosperity for Australia. An investment boom in the giant resource sector is already underway, with one liquified natural gas project alone worth A$43 billion and tens of billions of dollars in export earnings.
As of October, there were 74 minerals and energy projects under construction or committed to, worth a record A$112.5 billion. Some 267 other projects were undergoing feasibility studies or approval processes.
Such investment requires workers, fuelling an immigrant-driven surge in population growth. The government recently estimated Australia's population would expand by 60 per cent by 2049. All these new Australians need homes, and prices have already risen sharply in recent months. A building recovery is also underway. Figures out today showed approvals to build new houses jumped 5 percent in October, to be up 26 per cent for the year and at the highest since April, 2004.
"The RBA's forecast that growth in 2010 is likely to be close to trend and inflation close to target clearly implies a cash rate much closer to neutral than today's 3.75 per cent," argued Scott Haslem, chief economist at UBS.
A neutral rate is one that neither fuels nor restrains growth. "We thus retain our core view that the cash rate will be raised to 4-point-something by end of March. We target a 5.5 per cent cash rate in 2011," said Mr Haslem.
Reuters