Australia: Taking the lead with higher rates, but who will follow?
This post is a guest contribution by James Pressler* of The Northern Trust Company.
In a move that surprised some analysts, the Reserve Bank of Australia (RBA) hiked its Overnight Call Rate by 25 basis points to 3.25%. After a spate of strong economic indicators, signs of recovery from Australia’s major trade partners and a moderation in price increases, the markets had priced in some monetary tightening before year-end. This hike confirms those expectations, and along with a few choice comments in the RBA’s accompanying statement, implies that another hike could hit by year-end. Given the economy’s recent performance, we have no complaints about tighter policy.
Today’s headlines made a special effort to point out the RBA’s move was the first tightening amongst the G-20, but in all candor we humbly ask who else could have been a viable contender? With the Euro-zone still struggling with problems in some of its weaker member countries, the US in quantitative easing mode and having posted negative GDP growth since Q4 2008 (although Q3 2009 figures due October 29 should break that streak), and Japan’s base rate having flatlined years ago, only a few niche players within the G20 could even offer a challenge against Australia for first to hike.
But now that the RBA has made its move, the more interesting question is who will be the next to pull the trigger. Right now, the likely candidates are all in Asia: Singapore, South Korea and China. Singapore currently stands as the favorite simply due to timing – the Monetary Authority of Singapore meets on Monday, and now has the opportunity to tweak its monetary stance without being the first in the pool. Its economy posted one of the first technical recessions in Asia due to a plunge in net exports, but in turn its recovery has been quite brisk and without any price pressures. While the temptation to let the economy feed off of cheap credit is very strong, the authorities now have some incentive to remove the ultra- from its ultra-loose monetary policy and start the long process of normalizing interest rates.
Also worth mention is South Korea, which just a year ago had to reassure foreign investors it was in fact not going to slide into the abyss a la 1998. The economy did go through a four-quarter weak patch, but in fact did not experience a technical recession and like many others came back strong in Q2 this year – thanks in part to a little fiscal priming. More to the point, the Bank of Korea timed its moves well over the past year, moderating its rate cuts as to not feed into a domestic asset bubble. Now with Australia taking the lead, the Bank can offer a hike as keeping in line with the regional recovery.
China is the least likely of the three to make a move, although the People’s Bank of China (PBoC) can throw a curveball now and then. Officials have offered the usual batch of central bank talk to cover all possibilities while not committing to a particular position, but the central theme from the PBoC suggests that while a recovery is well underway, it is an uneven rebound and there is still significant fragility in certain parts of the economy. Along with a few other key words we think China will remain on hold until early-2010, although given how much bank lending grew in the first half of the year we cannot help but wonder if inflation is a concern.
With global trade having restarted – although from a lower base – it is no surprise that Asia is seeing the first fruits of recovery. Now that the RBA has validated its personal belief that the worst has passed with its own rate hike, other economies will follow suit before the year is over. Whether those economies are ready for higher interest rates, however, is another story altogether.
** James Pressler is an associate international economist at The Northern Trust Company, Chicago. He joined the bank in 1993 and has been in Economic Research since 1995.
Source: Northern Trust – Daily Global Commentary, October 6, 2009.
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