27 May 2009

Cash Rate

The RBA’s minutes were released yesterday for the October 6 Board meeting. This was the meeting where the RBA raised interest rates by 25bp to take the cash rate to 3.25%. It was the first interest rate hike since March last year (where rates were taken up to 7.25%). The language of this month’s minutes carried a relatively upbeat tone. The minutes note that the economy is “continuing to expand”, that growth is expected to be “around trend in 2010” and further “strengthen somewhat” beyond that. The RBA also notes that the IMF expects growth in Australia’s major trading partners to be close to trend in 2010.

These references suggest that the RBA will be keen to gradually take the cash rate back closer towards a more neutral setting. For this reason, our projection is that the cash rate will stand at 5.00% by the end of next year. In the near term, we expect two more interest rate hikes before Christmas, taking the cash rate to 3.75%.

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