The Reserve Bank has boosted its key cash rate to the highest since 1996

The Reserve Bank lifted it 0.25% to 7% at its board meeting in Sydney this afternoon, saying it expects the already high levels of inflation to further increase over the rest of this year before easing in 2009. And it hinted very strongly that more rate rises lay ahead if inflation doesn’t start slowing later this year.

It said at the end of its statement: “The Board will continue to evaluate whether the stance of policy will be sufficiently restrictive to return inflation to the 2-3 per cent target.” a clear threat to lift rates again.

Before the decision, the National Australia Bank said there was a 40% chance of a second rate rise this year. With this statement, the odds have firmed.

It was the first decision from the bank under its new system of announcing the decision the same day as the board meeting was held. Minutes from this board meeting will be released on February 19.

The decision was expected with all 27 economists surveyed by Bloomberg yesterday saying they expected rates to rise. A hold out, Goldman Sachs JBWere changed its mind in a note to clients overnight, saying they now expected the RBA to lift rates today. They had been previously on record as saying no rate rise today.

The Australian dollar firmed from around 90.60 US cents to 90.75 US cents within five minutes of the rise being announced. It had topped 91 USc in late morning trading. The sharemarket was easier: it was off more than 50 points after the decision at 2.30 pm, after trading around 40 points lower ahead of the news.

The bank made it clear the rise inflation in the December quarter (as shown by its own measures and the CPI) was a driver.

“Recent information points to significant inflation pressures. CPI inflation on a year‑ended basis picked up to 3 per cent in the December quarter, with underlying measures around 3½ per cent,” the bank said in its first statement accompanying a rate increase.

“This was a little higher than was expected a few months ago. Indicators of demand remained strong through the second half of 2007, and reports of high capacity usage and shortages of suitable labour persist.

“In the short term, inflation is likely to remain relatively high and will probably rise further in year‑ended terms, though the Bank expects it to moderate somewhat next year.”