Reserve Bank stays coy on pace of interest rate rises

23 November 09

The minutes of the central bank's November meeting - where the official cash rate was raised by 25 basis points to 3.5 per cent on Melbourne Cup day - point to Australia's better-than-expected employment rate and the improving economic conditions of our trading partners.

"The important consideration for the board was that, for the group of economies that comprise Australia's major trading partners, a broad range of forecasts were expecting growth to be around trend in 2010," the minutes say.

Economists remain mixed about whether the RBA will make mortgages more expensive before Christmas. In its economic note, Westpac says the minutes implied the RBA could pause on lifting rates in December.

But they said "the economic case in our view is not strong enough to change our call that a December 25-basis point rate hike is likely".

Small business are pleading for rates to be left on hold in the lead-up to the busiest shopping period of the year. Australian Chamber of Commerce and Industry director of economic and industry policy Greg Evans argued there was still sufficient weakness in the economy to stop the RBA pre-emptively lifting rates.

"We would be concerned about a third rate increase in the December quarter, especially as that could crimp demand running up to Christmas, especially with respect to small businesses," he said.

"This is make-or-break time for small business."

The RBA board members said in the minutes: "Looking ahead, members expected that if economic conditions evolved as expected, further gradual adjustment in the cash rate would most likely be appropriate over time, though the pace of the adjustment remained an open question."

Members were also conscious of balancing risks.

"On the one hand, business and consumer confidence could prove fragile, and economic activity at home and abroad might slow more than expected as the effects of stimulus measures faded," the minutes say.

But it adds that, on the other hand, "a lengthy period with interest rates at a very low level carried its own risks, particularly once the threat of serious economic weakness had passed".

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