In line with most forecasts the Reserve Bank of Australia yesterday lifted interest rates by 0.25%. The decision lifts the RBA’s cash rate to 6.75% and will mean an extra $68 per month on an average $400,000 mortgage.

Governor Glenn Stevens was clear in his statement that the strength of Australia’s economy is operating close to the limits of its capacity. Hawkishly, however, he pointed out that there are few signs of that strength diminishing as yet, and reports of high capacity usage and shortages of suitable labour persist, thus suggesting too much growth rather than not enough.

Commonwealth Bank senior economist John Peters says the statement suggests the RBA sees all the risks to the economy being on the side of too much growth, rather than not enough.
“It’s a hawkish statement that signals they’ve got a pretty firm tightening bias in place,” Peters says. “It points to stimulus coming from all corners; high capacity utilisation, consumers are spending, lowest unemployment in three decades, governments are spending as well, and new dwelling investment has started to become a positive factor and will make a bigger contribution as time goes on.”

The key question now is not if there will be another rate rise, but when. Such strong economic conditions could mean that more rises are on the way, perhaps as soon as December. Given that the RBA has increased interest rates twice in the last three months, it would be unwise to suggest that yesterday’s rise will be 2007’s last. Simon Turner