AUSTRALIA’S CENTRAL bank raised its key cash rate by 25 basis points to 3.25 per cent yesterday and heralded more to come, saying it was safe to row back on stimulus now that the worst danger for the economy had passed.

The Australian dollar jumped to a 14-month high and interbank futures slid as investors rushed to price in at least one more hike by Christmas, and rates above 4 per cent in a year. Markets elsewhere in Asia also moved to factor in expectations for more hawkish central banks.

The Reserve Bank of Australia’s (RBA) decision made it the first of the G20 central banks to hike as the global financial crisis eases and came as a surprise to many.

Markets, however, had been abuzz with speculation about a move given the strength of recent economic data. “The RBA had widely advertised it was near to edging up rates from their extraordinary lows, and now it’s done so,” said Rory Robertson, interest rate strategist at Macquarie. “t will be a gradual move from an emergency rate of 3 per cent to a still-easy 4 per cent.” he added.

It was the RBA’s first increase since March 2008, but only takes back a little of the 425 basis-points of easing delivered when the global credit crisis was in full swing. Indeed, by any historical measure, policy is still very accommodative in Australia, something noted by RBA governor Glenn Stevens: “With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy,” he wrote.

The move by the RBA puts it far ahead of most major developed nations, which show little if any inclination to tighten. Rates in the United States, the euro zone, Britain, Canada and Japan are all at or under 1 per cent.

The RBA’s pre-emptive policy largely reflects the strengths of Australia’s economy, which boasts a sound banking system and strong demand from China for its commodity exports. Australia was the only developed nation to grow in the first half of this year.

That helped Treasurer Wayne Swan sound sanguine on what was be an unpopular move in a country obsessed with home ownership.

“The Australian economy is outperforming other advanced economies and I guess many economists will see the decision today as a consequence of economic recovery,” he said.

So successful has policy been that the RBA had begun to worry about over-stimulating the economy. – (Reuters)