The Reserve Bank lifted interest rates 0.25% to 4% today, still below what economists called ‘trend’, or neutral, but we are heading towards that higher plain.

If Reserve Bank Governor Glenn Stevens is to be believed, we could have three more increases to go (he told a parliamentary committee last month that it could take another four rate rises to get to where monetary policy was neutral). With nine more meetings of the RBA board and three or four rate rises to be made, perhaps it will make it to 5% (a nice round number).

That’s the equation for the pundits and each a potential hole for them to stumble into, as we all did in February.

But rates will continue rising over the rest of this year with today’s decision described as “a further step in that process”.

If things go the way the RBA hopes, they could then take a breather for a while in 2011 to see if the economy can handle a cash rate of around 5%, with inflation in the target zone, wages growing moderately, unemployment falling, wages rising nicely and costs not blowing out in resources.

In reading today’s post meeting statement the wording of the last two paragraphs seems to have changed somewhat from the February 2 post meeting statement.

This is what Governor Stevens said today:

With the risk of serious economic contraction in Australia having passed, the Board moved late last year to lessen the degree of monetary stimulus that had been put in place when the outlook appeared to be much weaker. Lenders generally raised rates a little more than the cash rate and most loan rates rose by close to a percentage point.

Interest rates to most borrowers nonetheless remain lower than average. The Board judges that with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today’s decision is a further step in that process.

Here’s what he said on February 2:

With the risk of serious economic contraction in Australia having passed, the Board had moved at recent meetings to lessen the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker. Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point. Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being.

Interest rates to most borrowers nonetheless remain lower than average. If economic conditions evolve broadly as expected, the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term.

The change in the thinking can be seen in the bold bits (mine) in the final two paragraphs of today’s statement: they were the same as in the final two paragraphs of the February 2 post meeting statement.

We will have to wait for the minutes of today’s meeting to see if the phrase “finely balanced’ is used in connection with this decision. If anything the changed wording in the final paragraph suggests the bank now knows its course of action for this year after last month’s pause.

All that remains to happen are the rate increases, which won’t necessarily happen when we think they will.