If South Korea’s decision on Friday to hold interest rates is anything to go by, Australia’s shock move earlier in the week to raise did not – as some suggested – signal the start of a co-ordinated exit strategy by central banks.
Australia’s move to raise its key rate 25bp to 3.25 per cent fuelled speculation that Seoul would be the next major economy to tighten monetary policy. It wasn’t such an outlandish presumption, given that the recent dramatic improvement in South Korean exports led the government to predict 4 per cent GDP growth next year, a robust recovery from a forecast 1.5 per cent contraction this year.
Most economists, however, had warned ahead of Friday’s decision that raising rates would be premature, in line with an earlier remark by South Korean finance minister Yoon Jeung-hyun that it was too early to implement an exit strategy.
After all, household debt remains a concern, and although big conglomerates such as Samsung Electronics and Hyundai Motor are making strong profits, smaller enterprises, which account for 90 per cent of jobs, are still not out of the woods.
So when Lee Seong Tae, the central bank governor, kept the seven-day repurchase rate at 2 per cent, South Korean bonds and the Korean won rallied.
In fact as FT Alphaville noted earlier, some commentators think Norway will be the next to raise rates. As FT Alphaville’s Neil Hume observed, however, “Australia and Norway can, of course, afford to worry about asset prices since they have been least affected by the global crisis. However, at some point other central banks will have to address the question of runaway asset price inflation”.
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Australia rate rise boosts gold - FT