The Reserve Bank of Australia increased the official cash rate from 3.25 to 3.5 per cent yesterday, in a move that was widely predicted by the financial markets, although there was a slight chance that the central bank might have ordered a more aggressive 50-basis-point hike.

It seems that inflation is going to be a concern and major focus for many countries as the global economy pulls itself out of this recession. In Canada, people are talking about having to plan for a 2.0%-2.5% interest rate increase over the next few years.

However, concern that the RBA’s rush of rate rises would continue next month and into next year was pared back after a statement from RBA governor Glenn Stevens that many economists interpreted as dovish.

“With the risk of serious economic contraction in Australia now having passed, the board’s view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker,” Mr Stevens said.

“The adjustments at the October and November meetings will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.”

The statement prompted the interest rates markets to shift dramatically, trimming back the chance of a rate rise at the last meeting before Christmas.

The interbank futures market predicts the prospect of a third hike in December is 58 per cent – virtually a line-ball call – while the number of hikes likely in the current tightening cycle has also been reduced.

It had been expected that there would be up to 210 basis points, more than eight rate rises, in the official cash rate in the next year. However, that has now been sliced back to 160 basis points as the market lost confidence the RBA would act rapidly.

The four major banks each passed on the 25 basis point increase to standard variable mortgage rates almost immediately but the ANZ’s acting chief executive for Australia Graham Hodges warned the increase still did not match the extra costs of higher wholesale funding costs.

Tags: australia, Interest rates