RBA hikes rates 25 basis points in Australia

The Reserve Bank of Australia unexpectedly raised rates by 25 basis points to cool down its economy. It will “gradually reduce stimulus” in anticipation of sustained recovery. Australia has probably been the major economy least affected by the global economic slowdown, so one would expect the RBA to be the first major central bank to increase rates. However, the question now is whether other central banks will follow.

In the U.S., Donald Kohn and Richard Fisher have made fairly hawkish statements suggesting that the Federal Reserve is going to be more anti-inflation now than in the Greenspan era.  However, New York Federal Reserve Chairman William Dudley obviously didn’t get the memo about jawboning the market in a hawkish way.  Yesterday, he indicated that the U.S. Federal Reserve is likely to keep rates very low for a prolonged period for fear of choking off a tenuous recovery.

So while the RBA is raising rates, the Fed and the ECB may not follow anytime soon. That is certainly supportive of the Australian dollar.

Below is a CNBC video that gives you a chance to see the real-time reaction to the RBA’s decision and another with some commentary on the Aussie dollar.