Australia’s Economic Miracle Will be Damaged by Rate Hikes

In December, Australia's central bank raised interest rates for the third consecutive time. But making credit more expensive in the wake of a still weak recovery may prove to be very damaging for the Australian economy.

In one hand, Australia has weathered global downturn much better than other major economies. Interest rates cuts improved lending and stimulated housing market. And a sizable fiscal stimulus (1.7% of GDP) distributed in the period of just 6 months significantly boosted household consumption. The revival of demand from China also helped, particularly after commodities prices started rising.

On the other hand, although inflation may pose significant threat to recovery, it’s way too early to account for it. In fact, consumer prices stand at 1.3%, less than half the 20-year average. More importantly, interest rate hikes may negatively influence business and consumer sentiment as lending becomes more expensive and companies stop hiring. In fact, unemployment is at a six-year high and still climbing. Looking further, the rise in interest rates is causing a sharp appreciation of the Australian dollar, which is already at the highest level in more than a year. This will make Australian products less competitive abroad, damage exports and accelerate the job losses.

Anna Fedec,
11/9/2009 6:05:47 PM