RBA lifts rates to 7.25%

Yesterday the Reserve Bank of Australia lifted their official cash rate to 7.25%, only 100 basis points off the New Zealand rate. The accompanying statement is here.

I’m still unsure about how to read these new RBA statements – they are a little less focused than the RBNZ ones, often trying to focus on as many issues as possible.

The bit I look out for is when they say “a significant slowing in demand from its pace of last year is likely to be necessary to reduce inflation over time”. This implies to me that they might lift again soon.

However, they said this in both statements.  The best comparison comes from looking at the last paragraph in both statements:

March:

“Having weighed both the international and domestic information available, the Board concluded that a further tightening in monetary policy was needed to secure an inflation rate of 2‑3 per cent over time. As a result of this and earlier actions, and rises in borrowing costs which are occurring independently of changes in the cash rate, the overall tightening in financial conditions since the middle of 2007 is substantial. The Board will continue to evaluate prospects for economic activity and inflation in the light of new information.”

February

“Having weighed both the international and domestic information available, the Board concluded that a tighter monetary policy setting was needed now. In future meetings, the Board will continue to evaluate whether the stance of policy will be sufficiently restrictive to return inflation to the 2-3 per cent target.”

My feeling is that they have moved to a marginally more neutral status, although the bias is still far on the tightening side.

What does this mean for NZ? Well a higher official cash rate in Aussie should lead to an appreciation in their dollar, making our exports more competitive – just look at how happy Canterbury manufacturer’s were at the rising AUD/NZD cross rate.