Xmas rate hike on cards

Markets start pricing in rise

By Stephen Blaxhall
Thu 08 Nov 2007

The futures market is firming in its belief that a December rate rise is coming.

The futures market is beginning to price in a further rate rise in December following yesterday's announcement by the Reserve Bank of Australia (RBA) of a 25 basis points rate rise to 6.75 per cent.

"The money market is presently priced for about a 35 per cent chance that rates will be 7 per cent on December 5, which seems about fair given that the US credit troubles are stirring up once again," ICAP senior economist Matthew Johnson said.

Johnson said the RBA would want to leave the gate open for a follow up move, without committing to one.

"There can be no guarantees that 6.75 per cent is sufficient," he said. 

"The main blocks to a follow up in December are a continued widening of term spreads for cash due to a second leg of the credit crunch, or the local retail banks using the cover of a rate hike to lift variable mortgage rates by more than the 25 basis points increase in the cash rate." 

The last time the RBA hiked rates in November and December was 2003.

Yesterday's rise was the tenth consecutive rise in this tightening cycle and the second increase in the past three months.

AMP head of investment strategy and chief economist Shane Oliver said the latest rise, coming on the back of high anxiety about the US economy, added to uncertainty about the outlook for the Australian economy and shares.

"However, while the risks have risen, our view remains that the US will manage to muddle through with low growth and avoid a recession thanks to strength in the corporate and trade sectors and that global and in particular Asian growth will remain reasonable, albeit slower than it has been," Oliver said.

"We are hopeful that 6.75 per cent will mark the top for the cash rate."

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