Australian Dollar Outlook is bright as RBA looks to Hike Interest Rates

Australian Dollar Rate Outlook

THE Reserve Bank of Australia says further interest rate rises are "most likely appropriate", but the pace at which its adjustments will be made remains open. The central bank on November 3 raised the cash interest rate by 25 basis points higher to 3.5 per cent, its second rate rise in as many months.

The minutes of its board meeting that day, released today, said that if economic conditions continued to evolve as expected, a further gradual adjustment in the cash rate would most likely be appropriate over time. "But the pace of that adjustment remained an open question," the minutes said.

The RBA said it was "conscious of balancing risks" when considering adjusting interest rates, as it noted improved consumer and business confidence, better employment data and less spare capacity in the economy.

"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 said.

"Also, the rising Australian Dollar exchange rate would constrain output and dampen inflationary pressure, and credit conditions for some borrowers remained quite difficult. "On the other hand, a lengthy period with interest rates at very low level carried its own risks, particularly once the threat of serious economic weakness had passed."

The bank had lowered interest rates to a 49-year low of three per cent earlier this year to deal with the threat of the global financial crisis. Rates stayed at that historically low level between April and October, when the bank raised rates by 0.25 per cent.

The minutes said that financial markets, while still volatile, were in better shape than they were six months ago, while debt and equity markets were providing easier, and less costly, access to funding. Better-than-expected labour force data for September, showing a drop in the unemployment rate and an up tick in total employment, was evidence that unemployment was more moderate than expected, the minutes said.

The local economy generated 40,600 new jobs in September, while the rate of unemployment dropped 0.1 per cent to 5.7 per cent in the month. Quarterly consumer price index data (CPI) released around that time also showed easing in the underlying rate of inflation.

"Given the the earlier period of lower demand growth and the moderation of labour costs, this trend decline in inflation was expected to continue over the coming year, with underlying and CPI inflation expected to be consistent with the target in 2010," the minutes said.

The central bank's stated aim is for inflation to be within a target of two to three per cent in the medium term. The minutes showed the bank took note of a raft of economic data pointing to improved economic conditions among Australia's trading partners.

"Asian economies were generally growing at quite solid rates, after having had sharp contractions in some cases. "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."

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Pounds to Australian Dollars = 1.8155
Euros To Australian Dollars = 1.6633
Australian Dollars to US Dollars = 0.9298
Australian Dollars to New Zealand Dollars = 1.2457

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