Australia's Monetary Policy Has Been Driven By China’s Growth

In February, the Reserve Bank of Australia left interest rates unchanged despite of an influx of indicators pointing to growth acceleration and price pressures. Yet, after an explanation given by governor Stevens, it became clear that this unexpected decision was mainly prompted by recent Chinese easing of economic stimulus measures.
Anna Fedec, 2/4/2010 3:59:34 PM

Indeed, there is no doubt that Chinese massive fiscal stimulus has helped Australia's economy weather the worst global downtown in decades. For example, the value of exports to the fastest growing economy in the world increased by 31% in 2009, making China for the first time Australia's biggest exports market on an annual basis. Looking further, not only merchandise trade but also services had contributed to a rise. In fact, tourism and higher education are becoming more dependent on Chinese clients. For instance, it is estimate that more than 100,000 Chinese students are enrolled in Australian colleges and 335,000 Chinese tourists visited Australia in 11 months to November, 3% increases on previous year.

However, leaving rates unchanged based on China’s monetary policy may not be a very effective strategy for the Australian government. In fact, there are more and more signs that Australia’s economy is overheating and may need more rate hikes. For example, in the fourth quarter of 2009 inflation rose 2.1% on year over year basis with core consumer prices jumping 3.4%. Also, last year, house prices surged 13.6% from a year earlier, increasing in the three months through December by the most in more than six years.