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RBA raises rates again

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Following its monthly Board meeting, the RBA decided to raise the cash rate by 25 basis points to 3.75 percent, effective the 2nd of December. Although another rate rise was widely expected, it’s the first time the RBA has lifted rates in three consecutive months.

RBA governor Glenn Stevens explained in a statement that the further rate rise was brought on as “the global economy resumed growth. With economic policies remaining expansionary, growth is likely to continue next year, though it will probably be modest in the major countries, due to the continuing legacy of the financial crisis.” Stevens added that “in China and Asia generally, where financial sectors are not impaired, recovery has been much quicker to date and prospects appear to be for good growth in 2010.”

Although Australian borrowers will not welcome the rate rises, they do indicate that the effects of the financial crisis were relatively mild. That’s good news. Stevens explains that “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.”

Australia’s unemployment rate is holding well below 6 per cent, a pleasant surprise as many analysts predicted levels in excess of 8 per cent just a short time ago. Stevens added that “share markets have recovered significant ground, which, together with higher dwelling prices, has meant a noticeable recovery in household wealth.” The sharp recovery in China and India has helped to keep business investment into Australia at healthy levels.

“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” Said Stevens.

Dwelling prices have risen significantly over the year, and those worrying about a housing shortage will be pleased to hear that credit for housing is now expanding at a solid pace. Business credit has fallen however, Stevens explains that “companies have reduced leverage in an environment of tighter lending standards, and some lenders have scaled back their balance sheets.”