The Reserve Bank of Australia yesterday became the first major central bank to hike interest rates in the current business cycle, paving the way for others to follow as a much-hyped global economic recovery finally comes through, economists said.
They predicted the Bank of England would take only a day to follow Australia's lead with a rate rise of its own as the gloom over the world economy begins to lift.
"Conditions in the international economy are clearly improving," RBA governor Ian Macfarlane said in a statement on the decision to lift rates by a quarter point to 5.0 percent. "The US economy is strengthening and growth in Japan is higher than expected. Most of east Asia is experiencing improved conditions and China continues to grow rapidly."
Macfarlane said financial markets were already pricing in more optimistic growth estimates and economic forecasts were being revised upwards.
While the international situation has previously stalled monetary policy hawks on the Reserve Bank board, Macfarlane said the improving environment meant it could ditch the hands-off approach in favour of fine tuning sectors of the domestic economy such as housing credit.
"It is no longer prudent to continue with such an expansionary policy stance," he said. "The strength of demand for credit increases the danger associated with delaying a tightening of policy that is called for on general macro-economic grounds."
For his part, Treasurer Peter Costello, faced with the prospect of electorally-unpopular rate hikes hitting Australia's mortgage belt in the lead up to a general election next year, said the RBA was being "optimistic" about the global recovery.
"Overall the world has turned, yes, it's turned out of recession but I still think it's a faltering recovery in world terms," he said.
Westpac bank's head of global economics Bill Evans disagreed, saying there was a definite upswing in the world economy although it did not mean economic superpowers like the US and Japan were set to jack up interest rates just yet.
"I thought the Bank of England was going to beat us to the interest rate rise and we'd follow them next month but the Reserve Bank have surprised us and we just pipped London by a day or so," Evans said.
"I don't think the US and Japan will be rushing to follow suit as their domestic conditions are far less buoyant than ours," he said.
Evans said the Reserve Bank was likely to lift rates again in December and an official cash rate of 5.75 percent was possible next year.
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