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Fine-Tuning Australian Monetary Policy

The Reserve Bank of Australia’s (RBA) recent move to raise its overnight lending rate to 3.25%—the first rate hike in a G20 country in the aftermath of the financial crisis—came earlier than many onlookers would have predicted weeks or months beforehand. But the move wasn’t inconsistent with economic fundamentals.  Resilient commodity demand from emerging markets and a prompt policy response to the financial crisis saved Australia from an economic contraction as long and deep as those in the U.S. and the eurozone. Meanwhile, revivals in exports, imports, consumer demand and the housing and mortgage markets signaled to the RBA that it had space to tighten its monetary policy.

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6 Responses to “Fine-Tuning Australian Monetary Policy”

Michael Fabisiak: Stern NYUOctober 23rd, 2009 at 6:05 pm

The RBA has indicated that interest rates cannot remain at what they considered to be at “emergency low levels” for long. They have been preparing markets for more than 2 months that interest rates will have to rise back to “neutral levels” so that a housing bubble will not be encouraged. To this effect, markets are speculating that “neutral levels” mean interest rates at around 5%. So with the unemployment rate considered to be “peaking” at around 5.8% according to the RBA Governor in his speech 3 weeks ago, given that job vacancies are rising strongly (see ANZ Job Ads, Olivier Job Vancancies, and Dun & Bradstreet’s Employment Expectations Index, which are all very bullish). I think they will hike again before Christmas. It would have been foolish not to hike in Oct, because equities and the AUD would have collapsed in a non event by the RBA because markets would have thought that the RBA does not think that the economy and earnings are that strong to warrant a rate rise at the present time.

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Richard has published papers on wages policy, the taxation of financial arrangements and macroeconomic issues in Pacific island countries. Views expressed in these articles are his own and may not be shared by his employing agency. He is the author of How to Solve the European Economic Crisis: Challenging orthodoxy and creating new policy paradigms