FINANCIAL markets believe it is odds-on that the Reserve Bank will follow up yesterday's interest rate rise with a second rise on Melbourne Cup Day, after the bank declared the risk of recession over.
Australia became only the second developed nation to start raising interest rates when the Reserve board acted yesterday, just six months after it cut the official cash rate to a 50-year low of 3 per cent.
Business and trade unions united in denouncing the rate rise. If passed on in full by the banks, as expected, it would add $41.85 a month to the cost of financing a typical $275,000 mortgage.
By last night no bank had dared to be the first to lift rates. A simple passing on of the official increase would add $15.22 a month to the cost of financing each $100,000 owed.
But older Australians who live on their savings - for whom lower interest rates have meant squeezed incomes - will get relief from the rate rise. If passed on to depositors, yesterday's rate rise would add $15.22 a month to the return on keeping $100,000 in the bank.
Reserve Bank Governor Glenn Stevens said the rate rise was the result of the improving economic outlook.
He forecast that growth in 2010 would be back close to long-term trend levels (about 3.25 per cent).
Mr Stevens made it clear that yesterday's rise would be the first of a number, as rates return to normal levels - implying increases of 2 to 3 percentage points from the low point. The only clue he gave about their timing was that they would come "gradually".
"Economic conditions in Australia have been stronger than expected, and measures of confidence have recovered," Mr Stevens said. "[The] basis for such a low interest rate setting has now passed.
"With growth likely to be close to trend over the year ahead, inflation close to target, and the risk of serious economic contraction in Australia now having passed … it is now prudent to begin gradually lessening the stimulus provided by monetary policy."
Financial markets took the word "gradually" with a grain of salt. By the close of trading they had priced in a 71 per cent chance of a second rate rise next month, when the Reserve board meets on Melbourne Cup day.
The markets are forecasting a series of quick rises - five more by June and two more again by December, lifting mortgage rates by the end of next year by two percentage points.
Economists generally believe the Reserve will move more slowly. The National Australia Bank's chief economist Alan Oster said the bank's leaders "do not appear to be in a great hurry, given the still significant risks to the outlook".
Treasurer Wayne Swan tried to put the best face he could on what was obviously unwelcome news, calling it "a recognition by the Reserve Bank that the economy is recovering".
Mr Swan said no one liked rate rises, but Australians understood that they could not remain at record low levels forever. And he said rates would still remain very low.
"Common sense will tell you that as the economy begins to recover, the Reserve Bank will exercise its independence and moves rates accordingly," Mr Swan said. But shadow treasurer Joe Hockey blamed the Government, saying the rate rise was "the result of the Rudd Government's reckless spending" and would cause pain for all Australians, "particularly those with a mortgage or credit card".
Opposition Leader Malcolm Turnbull said the rate rise bore out the Coalition's criticism that the Government had spent too much on its stimulus package, causing interest rates to rise.
Modelling by Australian National University economist Warwick McKibbin, a member of the Reserve Bank board, predicts Australian and overseas fiscal stimulus will cause rates here to rise by 1 percentage point cent next year over what they would otherwise be.
Mr Swan responded angrily, accusing Professor McKibbin of "sitting in an ivory tower, advocating a position that would have massively increased unemployment and closed tens of thousands of businesses".
A new survey by the Australian Chamber of Commerce and Industry reported no improvement in bleak business conditions in the September quarter.
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