UPDATE: THE Reserve Bank of Australia (RBA) has raised official interests rates for the third consecutive month.
Rates have gone up 25 basis points to 3.75 per cent.
The RBA announced its decision this afternoon after its December board meeting. A third consecutive rise was unprecedented.
Debt markets had wavered between a 50 and 70 per cent chance that the central bank would lift the interest rate to 3.75 per cent from its present 3.5 per cent.
This will tighten the screws on retail spending somewhat ahead of Christmas.
The move will add about $47 a month to repayments on an average $300,000 mortgage, assuming retail banks match the move.
Announcing the decision, RBA Governor Glenn Stevens said with the risk of serious economic contraction having passed, the board had moved to gradually lessen the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker.
"These material adjustments to the stance of monetary policy will, in the board's view, work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead,'' he said.
Mr Stevens noted inflation had declined from its peak in 2008, helped by a fall in commodity prices and a noticeable slowing in private sector labour costs.
"In underlying terms, inflation should continue to moderate in the near term, though it will probably not fall as far as thought likely six months ago,'' he said.
But he warned that the headline year-on-year consumer price index (CPI) had been unusually low because of temporary factors, and will probably rise over the coming year.
"Both CPI and underlying inflation are expected to be consistent with the target in 2010,'' Mr Stevens said.
"The rise in the exchange rate during this year will have some impact in containing prices for traded goods and services in the period ahead, and will dampen growth in the trade-exposed sector of the economy.''
Meanwhile, lending for housing was expanding at a solid pace, even as dwelling prices had risen significantly.
Business credit had fallen as companies reduced leverage in an environment of tighter lending standards, and as some lenders scaled back.
"The decline in credit has been concentrated among large firms, which generally have had good access to equity capital and, more recently, to debt markets,'' Mr Stevens said.
"Share markets have recovered significant ground, which, together with higher dwelling prices, has meant a noticeable recovery in household wealth.''
At the same time, the global economy had resumed its growth pace.
"With economic policies remaining expansionary, growth is likely to continue next year, though it will probably be modest in the major countries, due to the continuing legacy of the financial crisis,'' Mr Stevens said.
"In China and Asia generally, where financial sectors are not impaired, recovery has been much quicker to date and prospects appear to be for good growth in 2010.
"Financial markets have improved considerably during 2009, notwithstanding periodic setbacks, and capital flows into Asia and other emerging market regions have been picking up.''
In Australia, measures of confidence were pointing to a gradual recovery of the economy even though the effects of the Federal Government's fiscal stimulus on consumer demand was fading.
But public infrastructure spending was starting to take up that slack and the prospects for an ongoing expansion of private demand, including business investment, were strengthening.
Mr Stevens also pointed to early signs of an improvement in labour market conditions.
"The rate of unemployment is now likely to peak at a considerably lower level than earlier expected,'' he said.
- with AAP
