Reserve Bank of Australia raises interest rates by a quarter-point: what it means

The one rate rise, of itself, shouldn’t mean much.  Despite this, the fact of the interest rate rise was widely covered in the financial press.  Many attributed the subsequent rally in European and US stock markets to the “positive” signal the increase, the first by a G-20 country, was purported to represent.  The idea presented was that other G-20 countries would doubtless be soon to follow.

Yes, the Reserve Bank of Australia’s move an encouraging sign, but not the kind that market commentators have been describing.

Australia, once seen merely as the successor to Argentina as the “Lucky Country,” is a thriving,  macro-economically well-managed place.  The RBA is highly skilled and well-respected.  But Australia is not a typical industrialized country along the lines of the US or the EU.

Australia has a land mass roughly equivalent to the United States’, but only about 6% of the latter’s population.  Partly because labor has always been the scarce factor of production, partly because its geographical isolation means high shipping costs, partly because it bought, hook line and sinker,  the colony scam perpetrated by Great Britain (“you focus on producing raw materials that you sell me at a low price and I’ll sell you finished goods at a high price”), the Australian economy is highly focused on trade in agricultural, and energy and other mining commodities.

Australian exports, for example, amount to about a quarter of GDP there, vs. about 7% for the US.  The country’s major trading partners are in the Asia-Pacific area.  Japan, China and Korea are the top three.

The interest rate rise is not because the domestic economy was sick, has now healed itself, and–by analogy–the rest of the G-20 will soon follow suit. It’s because the export business is picking up.

The reserve Bank of Australia makes three points in its press release explaining the rate rise:

1.  the global economy is resuming growth;

2.  recovery will likely continue in 2010;

3.  “Prospects for Australia’s Asian trading partners appear noticeably better…For Australia’s trading partner group, growth in 2010 is likely to be close to trend.”

The RBA move is good news:  it’s good news for Australia, for Asia, for emerging markets and for commodities.  There will doubtless be a rub-off effect of this growth on the US and the EU.  But it’s not a sign that all is well in either of the latter two areas.

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