The first 25-basis-point interest hike by a major economy has taken place. Australia’s tsunami-like interest rate ripple effect was felt around the world, but in a good way. The global markets took it to mean that the tide has turned and that we have seen the first sign that recovery is near. Who celebrated the most? Stocks, gold and even some currencies.
Australia’s decision to raise interest rates is expected to set the stage for other industrialized economies to do the same. The reasoning behind the decision is simple. After trillions of dollars have been poured into the global financial and credit systems, inflation or even hyperinflation is a distinct possibility that could stifle the recovery at best or snuff it out, at worst. Only, it is a concern that most world economies believe is longer-term in horizon, except Australia, obviously. As a result, the Reserve Bank of Australia hiked its key lending rate by 25 basis points to 3.25%, and Governor Glenn Stevens has hinted that more increases are likely to follow.
Why has this interest hike resonated so much with the markets? It is not as if we haven’t had interest-rate hikes before. But this was the first hike after Lehman Brothers collapsed last September, choking the life out of credit markets and basically triggering the Great Recession that forced central bankers to slash and hack interest rates, some to almost nonexistence, just to keep our heads above water. It mattered little if one or the other was strong or weak economy. All suffered alike, as did the international trade, cutting off most economies’ lifelines to run dry.
The Australian central bank’s move to hike its key lending rate was unexpected to an extent, but welcomed by the markets, because it is widely perceived as the first tangible piece of evidence that the global economy is healing. One of the immediate results was investors’ rush towards commodity-based economies and their currencies, propping up gold and Australian and Canadian currencies, among others. Gold swooshed by the $1,000-an-ounce mark and the U.S. dollar plunged, losing its perceived status of a safe haven when the Great Recession was still young.
The next question is: who might be next? The answer to this question lies in the so far achieved balance between employment and growth prospects. For many world economies, it might be too early to start tightening their monetary policies. Australia’s move was both unexpected and expected. It was unexpected because there have been no hints of when the decision would be made. But it was also expected in a way because Australia has managed somehow to escape the worst of the recession and has been struggling to contain inflation for quite some time before the global downturn occurred due to mounting pressures to increase wages within the confines of a really tight job market.
At this point, the majority of central bankers are more than eager to follow Australia’s suit, shut off the easy money taps and start draining stimulus cash out of the financial systems. But aside from only a handful of economies as strong as Norway’s, for example, most economies can only dream about it. Simply because, for the large majority, the global economic conditions are still difficult and deflation is still the biggest worry in most corners of the world.