Welcome to TimesPeople

Get Started
The latest activity in your network...

Latest Activity

Skip to article

Global Business

Australia Raises Key Interest Rate

Published: October 6, 2009

HONG KONG — Australia on Tuesday became the first major economy to raise interest rates in the wake of the global financial crisis, as policy makers around the globe debated how to withdraw their huge stimulus programs without upsetting a fragile economic recovery.

The Reserve Bank of Australia, in a move that came earlier than many economists had expected and reflected the relative strength of the nation’s economy, raised its main cash rate by a quarter of a percentage point, to 3.25 percent. The action reverses some of the series of rapid-fire cuts that the bank had made to the cost of borrowing in a bid to shelter the economy since September 2008, when Lehman Brothers’ collapse set off the global credit crisis.

Those aggressive cuts, by a combined 4.25 percentage points to a level last seen in 1960, plus a set of government stimulus measures, were widely credited with helping Australia become one of the few industrialized countries to avoid a major slump over the past year.

The bank’s decision Tuesday to start raising rates again was made amid mounting signs that the global economy was on the path to at least a modest recovery. That broad improvement has fueled a debate among policy makers around the world about whether the time is ripe to start unwinding some of the extraordinary economic stimulus measures they took after Lehman’s demise — or whether a precipitous withdrawal of those support measures could risk nipping the recovery in the bud.

Australia’s decision to forge ahead more rapidly than expected — most economists had not expected a rate increase for at least another month — fueled speculation that those countries that are most confident about their economic prospects might raise rates sooner rather than later.

The decision, said Frederic Neumann, a regional economist at HSBC in Hong Kong, “raises the chance that other central banks will follow suit, perhaps sooner than anticipated. First on the list is Korea, and we see a greater chance now of a hike this quarter rather than the next, with Taiwan, perhaps surprisingly, coming next in Asia.”

By contrast, the central banks of the world’s biggest developed economies are expected to keep their costs of borrowing at ultralow levels for some time amid concerns that the recovery remains both feeble and fragile in America, Europe and Japan.

At its last policy meeting in September, the U.S. Federal Reserve cautioned that the recovery would be slow and repeated its vow to keep the benchmark overnight interest rate at virtually zero for “an extended period.” That almost certainly means until at least sometime next year.

But while leaving rates on hold, the Fed is gradually beginning to step away from other measures to aid the economy, or at least discussing how to do so. The Fed said it would slow down its program to buy almost $1.5 trillion worth of mortgage-related securities, for example.

The European Central Bank, too, has warned that the nascent recovery will be patchy. Inflation is still extremely low or negative in the euro area, so interest rate increases from the historically low level of 1 percent will come at the earliest late next year, or at the beginning of 2011, most analysts say.

And the Bank of Japan, worried by the continued risks to its flagging economy, has suggested it would keep its overnight call rate at about 0.1 percent for some time. On Tuesday, the new Japanese finance minister, Hirohisa Fujii, described the economy as unstable and urged the central bank not to end support for corporate funding too soon.

Australia is the only Group of 20 country to have raised interest rates. Israel, a much smaller economy that is also in relatively robust shape, also recently increased rates.

“Economic conditions in Australia have been stronger than expected and measures of confidence have recovered,” in part thanks to various government stimulus measures and policy initiatives, the central bank’s governor, Glenn Stevens, said in a statement accompanying the rate decision Tuesday.

Meraiah Foley reported from Sydney. Carter Dougherty contributed reporting from Frankfurt.