By: Dr. Mike Campbell
The Central Bank of Australia has decided to leave interest rates on hold for a fifth straight month. The rate has been maintained at 4.5% - a King’s ransom in comparison with the rates on offer in the rest of the world’s developed economies.
Australia was the only major economy to avoid a recession – but that is not to say that it was unaffected by the global financial crisis. It was also the first major economy to increase its interest rates (which had been slashed to stimulate economic growth) in October last year.
Many analysts had anticipated that the Bank would order a further rate hike, bringing them more in line with their historical levels. The decision to keep interest rates unchanged was taken in response to the current global situation.
The Bank has been raising rates in order to prevent the economy from “over-heating” which could generate inflationary pressure. Over the past five months, the Australian Dollar has been appreciating against the Greenback and has risen from 0.8096 to 0.9722, yesterday, an appreciation of 20%.
Of course, this change has as much to do with weakness in the US economy as it has with strength down under. The decision to keep interest rates on hold led to a softening of Australian Dollar values, but was well received in the stock markets. Like Japan, Australia is feeling the squeeze in her export markets because of the high price of the currency.
The relative success in the Australian economy has much to do with demand for energy and minerals produced in Australia in the Indian and Chinese markets.