Australia signals end of the crisis

Opinion

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This article was published 09/10/2009 (5849 days ago), so information in it may no longer be current.

Australia joined Canada in leading the world out of the global financial crisis this week as the Australian Reserve Bank gave the strongest sign yet the worst has passed.

One year after the panic following the collapse of Lehman Brothers, Australia’s central bank gingerly lifted the nation’s official interest rates up one quarter of a per cent to 3.25 per cent.

The move on Tuesday made headlines, not only in Australia but across the financial world as analysts pondered who would be next.

Aussie home buyers who pay mortgage rates of at least two per cent above the official cash rate braced for higher monthly repayments of an average of $45 a month.

Wednesday morning, The Australian Stock Exchange leapt into life surging 1.6 per cent in the first few minutes of trade, partly because of the rate rise and partly on the back of surging gold prices which set off an international equities rally reaching all the way to Wall Street.

Analysts interpret the Reserve Bank’s decision as a definitive sign the central bank is bullish on an Australian economy which is heavily leveraged both to commodities and the future of China.

Reserve Bank governor Glenn Stevens made it clear in a statement that the low interest rates of the past 12 months were a direct response to weak economic conditions, which were now history.

“That basis for such a low interest rate setting has now passed,” he said.

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 gone, the bank’s board took the view it was prudent to gradually ease the monetary policy stimulus. Australians are allowing themselves a small pat on the back as the only wealthy western nation to sidestep a technical recession in the financial crisis, with growth of 0.6 per cent in the three months to June.

The interest rate decision also had resonance in Canada, which has strong similarities to the Australian economy, not least of which is its high reliance on commodities. The Canadian stock market surged on the back of the Australia’s decision with the loonie also reaching a recent high this week.

In a Bloomberg.com report Tony Demarin, chief investment officer of BCV Asset Management in Winnipeg, which manages about $135 million, said the Australian move was good news for Canada.

“In being a commodity nation Canada’s probably closer to Australia than the rest of the world is,” he said. “That’s (the interest rate rise) a signal for the whole world that one country’s doing it, the rest of the world can’t be too far behind.”

Both Canada and Australia are high commodity exporting nations with Australia’s close proximity to Asia and subsequent low shipping costs a key factor in its ability to take advantage of a resurgence in Asian economic strength.

Canada not only mirrors Australia in the commodities sector but has a far larger oil exporting sector, while both countries are major food producers in a world where demand for grain is on an ever upward trajectory.

But the glass-is-half-empty crowd in both countries have serious concerns the new optimism is merely a fiscal mirage created by the billions of stimulus dollars pumped into both economies.

Australian Opposition leader Malcolm Turnbull told the national broadcaster ABC the Reserve Bank had to boost rates because government stimulus had overheated a still fragile economy.

“They spent far too much money in a very poorly targeted way instead of being more judicious,” he said of the Labour government of Prime Minister Kevin Rudd.

“As a result they’ve spent more than they needed to, the economy is much stronger than they expected and the Reserve Bank is having to crank up interest rates while the government is still spending money hand over fist.”

But despite easing economic conditions, Treasurer Wayne Swan said the government intended to stick to its timetable for stimulus spending, though staged withdrawals are built into packages.

Australian retailers are deeply disappointed in the reserve’s decision, which comes just two and a half months before Christmas — retailers’ most fertile period of the year.

Margy Osmond, chief executive of the National Retailers Association, said the Reserve Bank had ruined the festive season.

“I think it’s premature to say retail is back on track, June and July figures were not terrific,” she said. “We’ve seen some increase in August and that’s good. But I don’t think that one month means that retail is back on track — one swallow doesn’t make a summer.”

Heather Ridout, the chief executive of the Australian Industry Group, also said the nation’s central bank appeared to have got ahead of itself.

“Even though our surveys are showing improving conditions, the general view is that conditions remain soft and uncertain.”

Michael Madigan, the Winnipeg Free Press correspondent in Australia, is the Sunshine Coast bureau chief for the Brisbane-based Courier Mail.