The [B]Reserve Bank of Australia[/B] unexpectedly raised interest rates to by 25 basis points to 3.25%, sending the Aussie dollar broadly higher against most of its major counterparts. RBA Governor Glenn Stevens said interest rates were dropped to a very low level in late 2008 and early 2009 on expectation of “very weak economic conditions and a recognition that considerable downside risks existed,” adding that “the basis for such low interest rate settings has now passed.” Stevens acknowledged that some areas of demand may stumble as government stimulus runs its course, but seemed broadly optimistic that “growth [is] likely to be close to trend over the year ahead [and] inflation close to target,” adding that “the risk of serious economic contraction in Australia [has] passed.” Stevens seemed particularly confident about the prospects for external demand, saying the “prospects for Australia’s Asian trading partners appear to be noticeably better” with growth rates close to long-term trend levels in 2010. Most critically, Stevens said that “it is now prudent to begin gradually lessening the stimulus provided by monetary policy,” suggesting more rate hikes are on tap in the months ahead. Trading in overnight index swaps suggests traders are pricing the likelihood that the RBA will raise rates by 175-200 basis points over the next 12 months.
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