Australia's monetary tightening has a long way to go

The Reserve Bank of Australia (RBA) unexpectedly hiked its cash rate by 25bp to 4.75% today. While the exact timing was a surprise, the resumption of monetary tightening was only a matter of when, not if. There is little spare capacity and the economy will probably expand at an above-trend pace in 2011-12. We forecast that the cash rate will rise by another 100bp by end-2011. This is far more than current market expectations and should bring more Aussie dollar appreciation against the US dollar.