October 6, 2009
RAISING INTEREST RATES DOWN UNDER: THE NEW NEW THING?
Someone had to be first. It turns out that it's Australia. The Reserve Bank of Australia raised its benchmark cash rate by 25 basis points to 3.25%. No longer are rates at a half-century low down under. And so the precedent has been set: the first central bank among the G20 nations has hiked rates.
"Economic conditions in Australia have been stronger than expected and measures of confidence have recovered," RBA advised in a press release accompanying the rate hike. "Overall, growth [for Australia] through 2010 looks likely to be close to trend." Nonetheless, the labor market in the country remains weak, the bank acknowledged. But as RBA reasoned, "With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy."
There will be more reports of rate hikes in the coming months and years. But it starts here. The question now is timing and magnitude. How soon will rates rise and by what degree? And when will the big central banks in the global economy follow suit? And, of course, there's the $64,000 question: What will be the impact on the global economy and markets?
Questions, questions, always more questions. The only constant: It's always a different set of questions.
But for now, a milestone has been reached. The Great Decline in rates is over. We've known that was coming for some time, of course. Now begins the inevitable sequel.
Risk, in short, is a perennial, albeit in an ever-changing state.
[Note: In the original post, we wrote that the Reserve Bank of Australia was the first central bank to raise interest rates. In fact, as one commenter pointed out, the honor goes to the Bank of Israel. We should have clarified our commentary by noting that the Reserve Bank of Australia was the first central bank of a large economy--i.e., a member of the G20 nations--to hike rates. The oversight has since been corrected in our post above. Sorry 'bout that. --JP]
Posted by jp at October 6, 2009 5:42 AM
Slightly pedantic but Australia weren't the first to raise rates. Isreal were there first - they raised on the 27-Aug. Nevertheless Australia are the first country of economic significance to raise rates.
Posted by: Will at October 6, 2009 6:16 AM