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rate, the first major economy to do so since the financial crisis
worsened last fall, may signal a vote of confidence in a global
recovery. Still, most economists don't expect the Federal Reserve or
other major central banks to follow Australia's lead and raise rates
anytime soon. Australia's economy is healthier than the US or
European economies, due to rising prices for metals and other
commodities it produces. But the decision by the Reserve Bank of
Australia to reverse some of the steep rate cuts it implemented last
year is a sign the economy is improving in parts of the world,
analysts said. A healthier world economy could help the United States
by boosting exports. "Recovery is starting to take hold" in Asia,
said Jay Bryson, global economist at Wells Fargo Securities. "Very
low interest rates there may not be necessary for much longer."
Australia's central bank governor, Glenn Stevens, said Tuesday the
risk of "serious economic contraction" in that country had passed.
Australia is benefiting from a strong rebound in China, a major
trading partner that imports huge amounts of Australia's iron ore
and other minerals. Its economy grew in the first two quarters of
this year, when the U.S. economy remained mired in recession. The move
helped boost the US stock market. The Dow Jones industrial average
jumped about 132 points, while broader indexes also increased.
Australia's move comes after the International Monetary Fund said
last week the global economy is recovering faster than expected. The
IMF raised its estimate for world economic growth to 3.1 percent in
2010 , from a previous forecast of 2.5 percent. Among major
economies, Norway is the most likely candidate to raise rates this
year, analysts said, as high oil prices bolstered its economy. The
country's central bank could boost rates as soon as its next meeting
on October 28. South Korea is another likely candidate, according to
Benjamin Reitzes, an economist at BMO Capital Markets in Toronto. The
country's central bank has already noted rising home prices and said
it might raise rates in response, he said. Asia is recovering so
quickly that some analysts worry it could face asset bubbles and a
spike in inflation if governments wait too long to withdraw stimulus
measures. Rising food prices already are becoming a problem in
India. HSBC economists said in a report Tuesday that South Korea,
Indonesia and the Philippines are particularly vulnerable to an
inflation blow-out. Still, when it comes to higher rates, " Australia
may prove to be an isolated case," said Geoffrey Yu, a London-based
currency strategist for UBS, given its much stronger recovery. Its
economy grew at a 2.5 percent annual rate in the April-June quarter,
Reitzes said, while the US economy shrank at a 0.7 percent rate. One
restraint on many countries will be exchange rates, several analysts
said: if they get too far ahead of the Federal Reserve, their
currencies will rise relative to the dollar, as investors seek out
higher interest rates. That, in turn, would make their exports to the
U.S. more expensive. That will cause some countries, such as
Switzerland, Canada and New Zealand, to delay raising rates for as
long as possible, Yu said. The Federal Reserve, which has pumped over
$2 trillion into the economy to spur lending and boost consumer
spending, isn't expected to raise the interest rate it controls until
sometime next year, at the earliest. The rate is currently at a
record low near zero. William Dudley, president of the New York Fed,
on Monday reiterated that the central bank will keep rates
"exceptionally low … for an extended period." Both the European
Central Bank and the Bank of England, meanwhile, are expected to keep
their benchmark interest rates at their respective historic lows of
1 percent and 0.5 percent when they announce their decisions
Thursday. Most analysts think that the ECB, which sets monetary
policy for the 16 countries that use the euro, is comfortable with
the notion of keeping interest rates at very low levels for a
protracted period. Last week, the ECB's president Jean-Claude Trichet
indicated that it is too early to consider raising interest rates.
The IMF is predicting that output in the 16 eurozone countries will
shrink 4.2 percent in 2009 , even though official figures show that
the recession in France and Germany is over. Italy, Ireland and Spain
are still struggling. Spain suffered a major housing boom and bust,
and its unemployment rate is almost 19 percent. When world leaders
from the Group of 20 major developed and emerging economies,
including Australia, met in Pittsburgh late last month, they pledged
to maintain low interest rates and other stimulative measures. They
also agreed to coordinate the reduction and removal of those
measures. But Yu said most central banks will set interest rates in
response to domestic needs, while coordinating on other measures, such
as unwinding emergency lending programs that support banks.
