Australia has become the first large developed economy to raise interest rates since the crisis began. The Reserve Bank lifted the benchmark rate by 0.25% from a 49-year low of 3%, saying that “the risk of serious economic contraction” had passed. Australia has avoided two successive quarters of negative growth and GDP rose by 1% in the first half of 2009.
What the commentators said
Good management and “a little luck” have fended off the worst of the global downturn, as Peter Smith pointed out in the FT. The government amassed a surplus during the good times that could then be spent on a hefty stimulus package; the banking sector avoided exposure to toxic assets; and strong trading links with a revived China have recently provided a boost.
But the markets’ expectation that Australian rates will be back at around 5% by late 2010 looks far-fetched, warned Gerard Minack of Morgan Stanley. Australia’s fiscal stimulus this year was the biggest in the OECD and “it remains an open issue how growth will fare” as it fades. The recovery in the developed economies is likely to be “tepid”, so growth in Australia’s Asian trading partners could well disappoint.
The fall in shipments to China in August suggests the boost from restocking is dwindling, added Sukhy Ubhi of Capital Economics, while consumption is hardly going to take off as government handouts dry up, and unemployment continues to rise.
Australia is also a special case. Rates in Europe, America and Britain aren’t “going anywhere for the foreseeable future”. Indeed, given the weakening data here of late, notably the slump in industrial production, the Bank of England could even extend quantitative easing again, reckons Howard Archer of IHS Global Insight.