Reserve minutes prompt betting on third rate rise

Markets are tipping a third straight jump in interest rates next month, after minutes from the latest Reserve Bank board meeting signalled further rises remained likely.

The minutes from the Melbourne Cup Day meeting, published yesterday, revealed the Reserve believed economic conditions were “significantly better than had been expected earlier in the year”.

At the November 3 meeting the board increased official interest rates from 3.25 per cent to 3.5 per cent, following a 25-basis point rise last month, in an effort to return borrowing costs to a more normal level.

But while the board made it clear it expected to continue winding back this source of stimulus, it also said its time frame was flexible.

“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,” the minutes said.

The emphasis on “gradual” adjustment is seen as a reminder that the board may pause next month if signs of weakness appear, but yesterday markets were betting on a 60 per cent chance of a rise to 3.75 per cent.

The interest rate strategist at Deutsche Bank, David Plank, said the minutes were less aggressive than markets had expected, but he continued to tip a rise next month.

Mr Plank said the chances of a rise had increased after last week’s surprise news that 24,500 jobs were created last month and a National Australia Bank index of business conditions surged to its highest level since January last year.

“We think the strength of employment, plus the strength of the NAB survey, just pushes the odds above 50/50,” Mr Plank said.

On the other hand, the Reserve noted that consumer and business confidence “could prove fragile” and the removal of government stimulus in Australia and overseas could dent the recovery.

Amid the market’s bet on a recovery, an Australian Chamber of Commerce and Industry survey showed small-business conditions had reached their highest levels since March last year.

But the chamber’s director of economics and industry policy, Greg Evans, said small-business investment was still fragile as retained earnings remained low and banks continued to ration credit.

“While small business experienced some welcome improvements in trading conditions, indicators for sales, profits and employment remained in contractionary territory over the September quarter,” Mr Evans said.

Source: Clancy Yeates - SMH