Australia on Tuesday became the first G20 nation to raise interest rates since the peak of the financial crisis, as its central bank increased the official cash rate from 3 per cent to 3.25 per cent. (Israel, for the record, became the first non-G20 developed country to raise borrowing costs in the period when it hiked rates in August).
As the FT reports, when raising rates from a 49-year low “emergency” rate, Glenn Stevens, governor of the Reserve Bank of Australia, said economic conditions in Australia had been “stronger than expected”, while measures of confidence had recovered.
Stephens, who cut Australia’s key rate by a record 4.25 percentage points between September 2008 and April, added that the economy is likely to expand “close to trend over the year ahead,” and predicted that inflation will remain near the bank’s target range of 2-3 per cent.
Indeed, the latest Australian growth figures, out last week, showed what Australian treasurer Wayne Swan called a “remarkable” performance — 0.6 per cent GDP growth in the April-June quarter compared both to the previous quarter and the same period the year before. And just to make sure everyone got the message, Swan pronounced:
“We are the fastest growing advanced economy over the past year and the only advanced economy to have recorded positive growth over the past year”.
Australia’s recession-beating trajectory has generally been the envy of neighbouring Asian countries — although some wonder to what degree China’s stimulus has helped support the country.
Nevertheless, while many are still struggling with the effects of the global downturn, the view is that Australia’s rate rise might now prompt others to follow suit, starting with South Korea and Taiwan.
The risk, of course, lies in how markets interpret such moves. For example, what if the RBA hike is construed as the first step in a co-ordinated central bank exit strategy? We note that ECB President Jean-Claude Trichet was quick to distance himself from such notions over the weekend, perhaps for that very reason.
As Reuters reported:
Asked if the G7 discussed international coordination of central bank interest rate increases to avoid exchange rate tensions, Trichet said: ‘The response is no. We did not discuss that.
Whatever markets make of it, it’s clear that few economists expected the move.
One economist in particular stole a march on his rivals. Although the Aussie dollar — one of the world’s most actively traded currencies — had risen over the past day on market speculation about a rate rise, just one analyst, Stephen Walters, chief economist at JPMorgan Chase in Sydney, predicted the move in Bloomberg’s survey of 20 economists.
The bank’s decision will be “a shock for consumers in particular and those first-home buyers who have been borrowing pretty big,” Walters told Bloomberg on Tuesday. However, he added, “I think the Reserve Bank will move quite slowly” on future moves with quarter-point increases “every couple of months or so.”
See the RBA’s statement here.
Related links:
Australia confounds the pundits - FT Alphaville