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RBA raises rate by 0.25%

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The cash rate has been raised by 25 basis points to 3.25% following the RBA Board meeting today, taking effect tomorrow, Wednesday 7th October, 2009. This follows 5 consecutive months of the cash rate remaining unchanged at 3.00%.

Glenn Stevens, the Governor of Monetary Policy has indicated that this because the “resuming growth” in the global economy. “With economic policy settings likely to remain expansionary for some time, the recovery will likely continue during 2010 and forecasts are being revised higher.” However, these expansions are “generally expected to be modest in the major countries, due to the continuing legacy of the financial crisis”.

Strong continued growth from China is “having a significant impact on other economies in the region and on commodity markets.” Economic response in global financial markets have “continued to improve”, despite “the state of balance sheets in some major countries remains a potential constraint on their expansion” said Stevens.

Australia’s economic conditions have shown strength over forecast expectations which has contributed to the recovery of confidence. Stevens adds that “some spending has probably been brought forward by the various policy initiatives”. However, with the effects of stimulus spending likely to diminish, areas of demand will soften.

Good news as well in unemployment figures, with no predicted higher rise as had expected. Stevens suggests that “weaker demand over the past year or so nonetheless has seen a moderation in labour costs.”

Overall, there has been strong growth in housing credit with dwelling prices rising noticeably over the past six months. “Higher dwelling activity and public infrastructure spending is also starting to provide more support to spending.” Investors are thanking these “better-than expected economic conditions” with a willingness to accept financial risk”. However, prospective borrowers on fixed rate loans have already seen a rise in interest rates to some extent due to forecast market rises for the cash rate. Share markets have also “recovered significant ground”.

“In addition, the exchange rate has appreciated considerably over the past year, which will dampen pressure on prices and constrain growth in the tradables sector.” Stevens advises that all of “these factors have been carefully considered by the Board” before increasing the cash rate.
Growth is the trend for 2010, with risks for Australia’s economic future and inflation close to target has now passed. “The Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy” as it will “work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.”