Aussie Central Bank Hikes Interest Rates

The Australian central bank has increased that country's interest rates by 0.25% to 3.25% today. Many have taken this as a sign that the world economy is rebounding. While the world is recovering from last autumn's meltdown, Australia is a unique case. The actions of the Reserve Bank of Australia (RBA) can't be taken as indicative of anything but the situation in Australia.

Unlike the rest of the developed world, Australia's economy never actually entered the land of recession, defined as two consecutive quarters of negative growth. Australia is actually creating jobs, up 46,000 in September. And Australians never got themselves into the kind of mortgage-related hot water that is the hallmark of the American mess.

Moreover, Australia's economy continues to rely heavily on the extractive industries, and the weakening US dollar has boosted commodity prices. This has kept cash in the Australian economy that other nations haven't had. Additionally, China is Australia's biggest customer when it comes to metals and such, and China is bouncing back fairly well. So, the Australian economy is one of the few in the world that actually might need a rate hike.

Over at the Royal Bank of Scotland, chief economist Kieran Davies expects more rate increases and says that Aussie rates could reach 4.5% by June. He believes that other G-20 economies are getting close to the same point, where they need rate increases. Interestingly, they are all smaller economies. "Australia has not had the overhang from the credit crunch. There are other emerging economies that are looking at tightening policy. Australia was the first in the G20 to go but there has been some hawkish commentary from the Reserve Bank of India, Norway looks like raising and there has been talk from the Bank of Korea."

While the EU and US are considering a second stimulus effort, the Australian government has stated that it will not "revisit" its stimulus package. Right now, it's pretty hard not to believe Donald Home was right in his 1964 book about Australia, when he called it The Lucky Country. Of course, in economics, luck has very little to do with it. Avoiding the casino culture that prevails on Wall Street can't be called luck quite so much as prudence.

© Copyright 2009 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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