By CountingPips.com
The Reserve Bank of Australia surprised the markets and unexpectedly increased its interest rate by 25 basis points earlier today. The decision to raise the cash rate to 4.75 percent was the first rate increase since May and was generally unexpected by market forecasters. The RBA move was dictated by the bank’s outlook of increasing inflationary pressures in the economy with strong demand for Australian goods and commodities from China and other emerging market countries.
Australia’s Glenn Stevens, Governor of Monetary Policy, said in his policy statement that the bank sees, “inflation rising again over the medium term” and “the moderation in inflation that has been under way for the past two years is probably now close to ending. Recent information suggests underlying inflation running at about 2½ per cent, with the
“Inflation is likely to rise over the next few years. This outlook, which is largely unchanged from the Bank’s earlier forecasts, assumes some tightening in monetary policy.”
Last week, Australian consumer price inflation data showed that prices rose by 0.7 percent in the third quarter of 2010 up from a 0.6 percent rise in the second quarter. Despite the increase, the data was just below market forecasts. On an annual basis, the third quarter consumer price data increased by 2.8 percent above the third quarter of 2009 following a 3.1 percent increase in the second quarter.
Stevens also commented on the global economy today saying that, “The global economy grew faster than trend over the year to mid 2010. Global growth will probably ease back to about trend pace over the coming year as strong recoveries in the emerging world give way to a more sustainable pace of expansion and growth remains subdued in the United States and Europe. At the same time, concerns about the possibility of a larger than expected slowing in Chinese growth have lessened recently and most commodity prices have firmed, after a fall earlier in the year. The prices most important to Australia remain at very high levels, with the result that the terms of trade are at their highest since the early 1950s. The turmoil in financial markets earlier in the year has abated, though sentiment remains fragile.”
The Australian dollar quickly felt the effects of the surprise rate announcement today in forex trading and rose to reach a new all-time high against the US dollar. The Aussie has also gained against the euro, Canadian dollar, British pound, New Zealand dollar and the Japanese yen in today’s trading, according to currency data from Oanda.
AUD/USD Chart – The Australian dollar gaining versus the US dollar in forex trading today, reaching parity and establishing a new all-time high.
