Australia First to Push Rates Higher
The first central bank has given its own stamp of approval to the current economic environment. The Reserve Bank of Australia upped its overnight rate 25 basis points to 3.25%. Though its a small step, it certainly demonstrates RBS’s view of the world economy.
Security Prices and Economics
As stocks trudge higher, the case for inflation is more easily made. Now well off market lows, reserve banks around the world will begin to feel the pressure and start raising rates. The problem is timing. You could raise rates too fast and curb economic growth (inflation) or raise them too slowly and create an unstable business environment.
Buy Australia?
The RBS’s quick move, I think, will pay off in the long term. In previous recessions we’ve seen banks such as the ECB among others act slowly and decisively, only to prevail when the tides shifted. I see this to be no different for Australia. As rates move higher, so should the Aussie Dollar, creating a double-whammy for investors who are already enjoying higher stock prices. And sorry contrarians, Australia’s move in the current recession was more than enough. Three percent was the lowest the rate had been in 49-years.
A Case of Geography
Luckily, Australia is properly placed by the economic powerhouse that is China. I fully expect that the Asian countries will be the first to pull out of recession, helped by free trade between themselves and the positive cashflow that China takes in on a daily basis. With so much wealth entering China via is manufactured exports the continent as a whole has plenty to gain from its positioning. You just can’t bet against manufacturing, especially in this economy.
