It was a fist pump for the strength of the Australian economy, but in the week prior to the decision, while analysts were backing a rate rise, on the street it was a matter of will they or won't they. At different points, it was no and then yes and then no and then on the back of new and favourable employment ads data, it was yes again. Either way, everyone seemed sure that if a interest rate hike didn't occur in October, it would certainly happen in November, Melbourne Cup Day to be exact, traditionally one of the biggest gambling events of the year for Australians.
Australian Dollar and International Media Impressed
The Aussie dollar liked the rate rise, reaching a 14-month high of 88.8US cents just after the announcement and so did the international finance media. The story hit the front pages around the world, indicating a hunger for a good news story in global financial circles.
Commsec, the online trading and investment arm of the Commonwealth Bank (Australia's largest bank) aired a video report from its Chief Economist, Clive James immediately after the rate decision was handed down. James said, "The fact that the Reserve Bank is lifting interest rates shows that our economy is in very, very strong shape. It certainly wouldn't be lifting interest rates if it wasn't confident about the prospects for the economy over the next twelve months."
Reserve Bank of Australia
Indeed, in his statement announcing the rate rise, Governor of the Reserve Bank of Australia, Glenn Stevens said, "Economic conditions in Australia have been stronger than expected and measures of confidence have recovered."
The Reserve Bank's response to weak economic conditions in late 2008 and early 2009 in the form of emergency interest rate cuts was deemed to have done the trick. "That basis for such a low interest rate setting has now passed," said Stevens.
Justification for Interest Rate Rise
More specifically the Reserve Bank's decision was based on the following factors -
- Unemployment has not risen as high as expected (although the data for September is expected to show a marginal increase to 5.9%)
- Housing credit growth has been solid and dwelling prices have risen over the past six months
- Interest rates on fixed loans have already shown rises
- Inflation is on target
Commsec's Clive James believes the rate rise will be viewed favourably by self-funded retirees and investors, whose investment-based incomes have suffered badly due to low cash rates and falling dividends. In terms of the Australian stock market, he says, "We believe from here the sharemarket moves higher," with predictions that the ASX200 will reach between 4900 and 5100 by the end of the year and 5300 by June 2010.
As for mortgage-holders, James says, "For Commonwealth Bank customers, over 90% of existing customers are paying higher installments than what they need to." In short, pre-existing borrowers with Australia's largest bank have taken advantage of lower interest rates to pay down their mortgages and so will not immediately feel the pinch.
More Interest Rate Rises to Come
However, this recent interest rate rise, effective from October 7, is generally touted to be only the first step in the Reserve Bank's plan to lift rates to more normal levels and Australians can expect another rate hike come Melbourne Cup Day in November.
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