Double strength rate rise narrowly avoided: RBA

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It now appears certain that interest rates will rise again next month after revelations today that the Reserve Bank of Australia came close to lifting rates by 0.5% when it last met two weeks ago.

Minutes of the meeting released this morning show that the RBA board came breathtakingly close to putting up rates by twice as much as the 0.25% rise that was announced on 5 February.

RBA board members thought a “good case” existed to lift rates by 0.5% to send a stronger signal on inflation and the decision to implement a smaller rate rise was “finely balanced,” according to the minutes.

Weighing against the need for a bigger rate rise were uncertainty on global financial markets and the fact that the effect of previous rises, including those implemented by the banks themselves, were yet to be fully understood.

But it could be just a matter of time until we see the additional 0.25% rise. The board indicates it would be prepared to raise rates in March and will be watching closely to see if inflation falls back into the 2% to 3% band within a “reasonable period”.

A speech by RBA assistant governor Malcolm Edey to a Committee of Economic Development of Australia meeting today suggests the bank hasn’t seen much to reassure it about the need not to raise rates in the intervening weeks.

According to Edey, the chief concern for the RBA remains putting a lid on domestic demand.

“The Australian economy to date has stayed robust, and the main domestic challenges are those of strong demand, tight capacity and inflationary pressures,” Edey says.

On the markets, at 12.25pm the S&P/ASX200 is up 1.2% on yesterday’s close to 5624.1, with traders buoyed this morning by the news that Japanese and Korean steel makers have agreed to pay 65% more for iron ore.

And the strong pointers to a further interest rate rise today have helped the Australian dollar higher – at 12.25pm it was trading at US91.85c, up from yesterday’s US91.25c close.

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