Published: Tuesday, 3 Nov 2009 | 2:53 AM ET

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Australia's central bank raised interest rates for a second straight month on Tuesday as it moved to gradually lessen stimulus in an improving economy, but it left a question mark over expectations for another hike in December.

Yet the Australian dollar dipped and bill futures rallied as investors detected a hint of caution in the Reserve Bank of Australia's (RBA) words even as it lifted rates by 25 basis points to 3.5 percent.    

"The statement suggested the RBA was open minded about skipping a hike in December, and then going in February," said Rory Robertson, interest rate strategist at Macquarie.

The RBA never holds a monthly policy meeting in January.

"They mentioned the strength of the exchange rates and used the key word 'gradually', which is taken to mean it will tighten in small steps but not necessarily at every meeting," he added.

The market had been fully priced for a rise to 3.75 percent next month, but after the announcement interbank futures climbed 0.095 points to 96.35, implying a rate of 3.65 percent.

"It's interesting that the Reserve Bank in its history has never lifted interest rates for three consecutive meetings," noted Craig James, chief equities economist at CommSec.

"We believe they will hold fire in December, and come back in February after they have had time to assess the impact of the rate hikes on the economy," he said.

Outperforming

The central bank's October hike had made it the first in the G20 to tighten since the global credit crisis blew up and this latest move could add to pressure for movement elsewhere.

Central banks in the United States, euro zone and UK all meet this week but none is considered remotely close to lifting rates.

Australia was almost alone among developed economies in dodging recession, thanks in part to aggressive stimulus, a sound banking system and Chinese demand for its commodity exports.

That relative outperformance was highlighted by the Labor government's mid-year financial review out this week where it sharply revised up its forecasts for economic growth while cutting the likely peak for unemployment.

The RBA has argued that, with the economy performing surprisingly well, there was no need for rates to be at 50-year lows and that keeping them low could over-stimulate some sectors.

Policy makers have been particularly anxious to avoid inflating the sort of bubble in housing prices that wreaked so much damage on the U.S. economy.

Figures out Monday showed national house prices jumped 4.2 percent in the third quarter to a record high, surpassing the previous peak from early 2008.

That's one reason some analysts still expect a steady drumroll of hikes from here on.

"We're getting mixed signals on the speed of when they're going...but if the economy continues as it is you'd have to think that we'll be lining up this time next month for another go," said Michael Blythe, chief economist at Commonwealth Bank.

Interbank futures still imply rates of 4.75 percent by June next year, while a measure from Credit Suisse based on swap rates shows no less than 189 basis points of tightening priced in for the next 12 months.

That would lift the cash rate above 5 percent and back to levels that analysts consider neutral for the economy -- neither retarding nor stimulating growth.

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