The Reserve Bank of Australia (RBA) today lifted official interest rates by a quarter percentage point to 6.25 percent in a widely expected move after the central bank held its board meeting yesterday.
RBA governor Glenn Stevens said the hike was necessary to curb inflationary pressures in an economy in which domestic demand continued to expand and the jobs market remained tight.
He said the last two rises in May and August were starting to impact, particularly on household demand for credit.
'Wait and see'
ANZ senior economist Mark Rodrigues said the RBA would be in no hurry to move again and would wait to see how the economy responded to the latest move.
"I think having implemented that, the bank will want to wait and see the effects of that tightening, particularly against the backdrop of a slowing non-farm economy," he said.
"Of course, the drought is likely to detract significantly from growth next year."
Drought bites
Commonwealth Bank chief economist Michael Blythe said there was near-universal consensus amongst economic commentators that today's rise would be enough to do the job.
"The softness evident in last week's September retail trade numbers serve as a timely reminder that the economy is not immune to some of the negatives at work," he said.
"On top of all that, the drought has moved from risk to reality."
History showed that the typical drought could cut gross domestic product growth by 0.5 to 0.75 percentage points a year, he said.
Mr Stevens said at this point the impact of the drought appeared unlikely to significantly affect the medium-term outlook for inflation.
It said today the annualised underlying rate was likely to remain around three per cent in the near term and that the headline rate, last clocked at 3.9 per cent in the September quarter, would reverse in the quarters ahead.
The RBA targets a range of two to three per cent over the medium term.
Macquarie Bank economist Daniel McCormack said the next move in interest rates could be down, although not until the fourth quarter of 2007.
"In combination with the drought, and a slower global economic picture, domestic economic growth could be "a bit soggy in early
2007," he said.