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The RBA raised its cash rate 25bp, to 3.25%, following its board meeting today, the bills market having priced in about a 50% chance ahead of the meeting.

Notable in the accompanying statment is the RBA's emphasis on a "gradual reduction of the stimulus provided by monetary policy." While the rate hike was one month earlier than expected, analysts continue to think that the RBA will tread carefully and hike rates another 25bp in Q4 and 50bp in Q1, essentially removing what thinks is the "emergency" cash rate setting by Q1 next year, before pausing at 4.00% to assess the global growth situation.

For the AUD, the surprise rate hike was a positive, and the fact that the RBA is the first G10 central bank to hike rates may add some follow-through to the currency's move today.

In today's environment in which the loss function for a central bank is percevied to be very asymmetric, with premature withdrawal of stimulus viewed as much worse than a belated tightening, stepping up to the plate will suggest both confidence that the economy can deal with the tightening cycle and acceptance of the exchange rate consequences. As a group, G3 economies, asset markets and central banks were lagging those of the smaller G10 and major EM economies, with price consequences because global capital flows were being forced into smaller capital markets. The AUD move highlights the risk that as a group, the commodity currencies will outperform G3 (as well as the USD); hence the knock-on effects.