Reserve Bank of Australia Lifts Cash Rate Again

RBA Raises Interest Rates by 0.25 for the Second Consecutive Month

Nov 3, 2009 Jo Jackson

The Reserve Bank of Australia lifted the official cash rate by 0.25 percentage point to 3.5% on 3 November 2009. This follows a rise in October 2009, with more expected.

While most Australians were busy concentrating on the Melbourne Cup, the race that stops the nation on the first Tuesday in November, the board of the Reserve Bank of Australia (RBA) made the decision to raise rates by 0.25 of a percentage point for the second month in a row to take official cash rates to 3.5%.

The rise was expected by the financial market and the statement explaining the increase was almost identical to the one given last month. The Australian economy has weathered the global financial crisis far better than most nations and it is expected that more rises will occur over the course of the next few months.

The State of the Australian Economy

At the start of 2009 interest rates in Australia were cut to the lowest level in 50 years to ensure the country did not go into a major recession. Latest statistics show that unemployment has fallen and there are more jobs in the economy, so now that the emergency has passed, rates must rise to avoid the economy overheating and inflation rising.

Inflation fell in the September quarter but the annual underlying rate was 3.5% which is above the RBA target of 2 to 3 per cent. However, the RBA expects inflation to continue to fall due to effects of the high value of the Australian dollar which reduces the price of imports and keeps downward pressure on the traded goods sector.

How the RBA Interest Rate Rise may Affect the Economy

The Australian dollar will remain strong because of the high interest rates. This will make things harder for exporters, import-competitive businesses, the tourism sector and manufacturers. Agricultural and mining exporters are likely to feel a strong effect from the currency level and expected rate rises over the next few months will keep the Australian dollar at elevated levels.

The recovery in the housing market may not proceed at current levels due to the increase in interest rates, and therefore mortgage payments, coming as the federal governments first-home buyers grants are being reduced. Rising interest rates can also put more pressure on the labour market and could cause another round of skill shortages.

How the Banks Have Reacted to the RBA Rate Rise

Australia’s big four banks, National, Westpac, ANZ and Commonwealth, account for about 85% of the mortgage market. They have already announced they will be matching the RBA rate rise with a 25 basis point increase in variable home loan rates. For an average loan of $400,000 this equates to about $40 per month.

National Australia Bank and Westpac Banking Corporation will increase rates from Friday November 6 while ANZ Banking Group and Commonwealth Bank of Australia, which is the biggest lender, increases will come into effect on Monday 9 November. Credit cards and business lending will generally rise by a similar amount. Smaller lenders are expected to follow suit.

Sources:Reserve Bank of Australia Statement by Glenn Stevens, Governor, Monetay Policy, 3 November 2009.

"Rising rates turn up heat on Labor", Australian Financial Review,4 November 2009, page 1,

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Australian Cash Rates Rise in November 2009	RBA Raised Rates on Melbourne Cup Day	Reserve Bank of Australia Governor, Glenn Stevens
Australian Cash Rate for the Last Twenty Years	The Big 4 Banks Have Matched the RBA Rate Rise