RBA lifts rates to 7.0%

The Reserve Bank of Australia lifted its cash rate to 7.0%, on the back of higher than expected inflation outcomes.  In the statement, Governor Stevens stuck firmly to the uncertainty line while admitting that even this lift in rates may not be sufficient to tame inflation.  Continued strength in domestic demand is likely to push them to increase rates again.

For New Zealand this implies a narrowing of the yield gap between Aussie and NZ.  As a result, the relative value of the NZ$ should ease, helping exporters.  A lower cross-rate with Australia then gives the RBNZ one less reason not to increase rates, increase the probability that the Bank will lift rates to 8.5% over the coming months.

  • Kimble

    Why couldnt they just raise rates by 1% in one go instead of 4 increases of 1/4?

  • “Why couldnt they just raise rates by 1% in one go instead of 4 increases of 1/4?”

    Best answer I could give to that is uncertainty. They might want rates to be 1 basis point higher over the next year given current expectations, so they will tell the market that (which will lead to it being priced into the futures market – giving some of the longer term impressions of tightening), but they increase by a quarter at a time given the possibility of a worsening credit crunch.

    Also, Central Banks (except in the US) are scared of dropping rates too soon after lifting them, as they think this impacts badly on their image. As a result, they like to be as flexible as possible – slowly lifting rates does this for them.

  • Interestingly, the NZD/AUD cross is moving higher, not lower.
    I guess the markets think that the RBNZ will have to play catch up at some point, and after todays employment data, the pressure is on the RBNZ.

    And if the world does slow, then Australia’s hard commodities like coal and iron will weaken faster than New Zealand’s food…people still have to eat!
    But having said that, I can’t see the NZD/AUD much over 0.9000.

    If it gets there, its a sell.

  • “after todays employment data, the pressure is on the RBNZ”

    I think this is the kicker. The market expected a rate rise in Aussie and had it priced in. The statement was relatively neutral so they didn’t react. Employment data here was far stronger than anticipated – waking up the market to the fact that rate hikes are still on the table.

    Todays jump is also related to a jump in stocks in the US. Higher equity prices -> lower perceived global risk -> more carry trade.