The Reserve Bank of Australia has again met expectations, increasing the cash rate by 0.25 per cent at its December Board meeting today.

The hike, which takes the cash rate to 3.75 per cent, follows similar rises in October and November as the central bank looks to lessen the impact of monetary policy stimulus on the recovering economy. The RBA had cut to as low as three per cent in the wake of the global financial crisis, but now sees it as prudent to take the cash rate back to historically ‘normal’ levels of around 5-6 per cent.

“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,” RBA Governor Glenn Stevens suggested. “In Australia, the downturn was relatively mild, and measures of confidence and business conditions suggest that the economy is in a gradual recovery. Prospects for ongoing expansion of private demand, including business investment, have been strengthening.”

Both CPI (consumer price index) and underlying inflation are expected to be consistent with the target in 2010, Mr Stevens said, suggesting hikes from here will continue to be steady rather than sharp.

“Credit for housing is expanding at a solid pace, and dwelling prices have risen significantly this year,” the Governor added. “Business credit has fallen, as companies have reduced leverage in an environment of tighter lending standards, and as some lenders have scaled back their balance sheets. 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. Share markets have recovered significant ground, which, together with higher dwelling prices, has meant a noticeable recovery in household wealth.”

Mr Stevens said that the Board saw economic growth likely to be around trend data, ensuring that the current extent of monetary policy stimulus was no longer warranted.

“With the risk of serious economic contraction in Australia having passed, the Board has moved at recent meetings to lessen gradually 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,” Mr Stevens concluded.