The good old Reserve Bank of Australia today became the first monetary authority in the G20 to raise interest rates since the onset of the credit crunch. The move was a surprise to most of the world, though to judge from the Bank's statement , it was already priced in to local markets.
The RBA has form in this regard -- it was the first central bank to start raising rates after the 9/11 atrocities, implementing its first rate hike in May 2002, having cut only modestly in response to the attacks. With hindsight, you'd be hard-pressed to say it was wrong about that -- would, indeed, that others including the Fed had seen fit to follow suit. As I've suggested before, the RBA's steady-as-she-goes approach throughout the past decade looks massively smarter than the compulsive tinkering of the Fed, Bank of England and others.
Currencies (other than Sterling) and commodities have rallied in the wake of the RBA decision, which markets seem to see as evidence that the global economy really is on the mend. Caution is needed here. Unlike the US, Eurozone, UK et al, Australia has not experienced a recession in the past couple of years. Labour markets and costs have therefore eased much less than the RBA had expected. What's more, as the RBA statement makes clear, its economic prospects are rendered much more favourable by the signs of a strong recovery in key Asian economies, notably China. In the circumstances, the longer the RBA delays in raising rates, the more risk it will run that inflationary pressures will start to mount.
These conditions are simply not replicated anywhere else in the G20. As a result, it's unlikely that any other central bank will start hiking rates until well into next year. An outlier, then, rather than a straw in the wind -- but that's not to suggest that the RBA has made a mistake.
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