Australia central bank raises rates

By Wayne Cole

SYDNEY (Reuters) - Australia's central bank raised interest rates for a second straight month on Tuesday as it steadily withdrew stimulus from an improving economy, but was careful not to fuel expectations for another hike in December.

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 0.110 points to 96.37, implying a rate of 3.63 percent.

Doubts about a December hike undermined the local dollar, pulling it down over half a U.S. cent to $0.9015.

"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.