RBA avoids hints on future rate rises

The Reserve Bank (RBA) has not given any direct hints about the future path of interest rates in the minutes of its board's monthly monetary policy meeting.

The meeting was held in Sydney on October 6, and confirmed widely held expectations by raising the cash rate by a quarter of a percentage point to 3.25 per cent.

The consensus in financial markets is that the RBA is planning to raise the cash rate steadily over the coming year.

The futures market has it hitting 5 per cent by mid-2010 and its long-run average of 5.5 per cent by the end of the year, but there was no clear signal in the minutes that this was faster or slower than the RBA has in mind.

Among the factors arguing against a rate rise was the uncertainty surrounding the outlook for most of the developed world.

The board also noted the unexpected strength of the domestic economy may have been largely because fiscal stimulus measures had been more effective than forecast, "which left open the attendant risk that activity might slow as that stimulus faded".

The Australian dollar's rise would also act as a contractionary influence on activity and help to corral inflation.

However the arguments in favour of a rate rise held sway.

The RBA said the board members believed the risks in waiting to raise rates had increased, notably because underlying inflation was not only still above the 2 to 3 per cent target but the expected trough over the coming year was now higher than previously thought.

Moreover, the economy was expected to grow "close to trend" (presumably the long-run average of just over 3 per cent per annum) through 2010, barring any setbacks and despite a fall in gross domestic income caused by the falling terms of trade.

The economy was then expected to accelerate further.

On balance, the RBA judged the risk to economic outlook "had diminished significantly over recent months".

"This meant that the balance of risks was now such that the current very expansionary setting of policy was no longer necessary and possibly imprudent," the RBA said.

- AAP