In lifting interest rates today, the Reserve Bank of Australia has pre-emptively shifted monetary policy from 'neutral' to 'restrictive', to stop inflation rising above its 2-3 per cent target a year or more down the track. It can only be seen as a sign of the central bank's confidence in Australia's China-boom story and its determination to make sure this boom is properly managed.

This will be controversial, firstly because it follows last week's soft September-quarter inflation number. But Reserve Bank governor Glenn Stevens now says the deceleration in inflation from 5 per cent to around the middle of the 2-3 per cent band is ending. Last week's Consumer Price Index was helped by "unusual softness" in food prices, which is likely to reverse. The central bank does not appear to have significantly lowered its forecast that inflation is now set to rise toward its 3 per cent ceiling over the next few years, even with higher interest rates.

Eoin Treacy's view Commodity price inflation led by coking and thermal/steaming coal, iron-ore and food is likely to become a more pressing issue for Australia as the global economic recovery picks up pace, led by it's major clients.

Australian interest rates at 4.75% are now equivalent to the troughs seen in 1993/94, 1999/2000 and 2002/03 all of which marked periods of easy monetary policy aimed at promoting growth. The stimulus measures implemented during the credit crisis succeeded in averting an Australian recession but the risk now is that the flood of credit is fuelling inflationary pressures. Nevertheless, while Australian interest rates are on the path to normalisation, they have a way to go before they could be considered restrictive.

The Australian 10yr bond peaked in early 2009 near 96 and while it rallied somewhat from April, it has not held the gain and fell back below the 200-day MA this week. A sustained move above 95 would now be required to question potential for additional downside.

While historically 4.75% is not a particularly high level, the interest rate differential particularly between Australia and the USA, Europe and Japan is putting upward pressure on the Australian Dollar. This long-term chart of the AUD/USD chart illustrates that the last time the Australian Dollar traded above US$1 was during the last commodity bull market in the 1970s. Given the secular bull market in commodity prices the psychological $1 level is unlikely to offer anything other than temporary resistance.