The Reserve Bank of Australia, the country’s central bank, surprised just about everybody by keeping its benchmark interest rate unchanged today, February 2.
All 20 economists surveyed by Bloomberg had predicted a quarter-percentage-point increase to 4%. Futures markets rated odds of an increase at 74%.
Why do you care if you don’t live in Australia or own much in the way of Australian stock and bonds?
Because the decision indicates that central banks in the rest of the world are going to be very cautious, even more cautious than financial markets now expect, about raising interest rates very quickly.
The Reserve Bank of Australia’s pause came after three rate increases. Australia was the first country in the developed world to raise interest rates after the global economic crisis. And it has become something of an indicator for central bank interest rate policies.
The central bank’s decision to pause came as business confidence fell to a six-month low and evidence grew that the bank’s rate increases in October, November and December were hurting home sales. Borrowing for home buying fell to a five-year low last month.
The pause in interest rate increases sent the Australian dollar to a six week low after the central bank’s announcement.
In the long range, the pause certainly suggests that even when the Federal Reserve and the European Central Bank start to raise rates late in 2010 or early in 2011, the increases will be very, very gradual so that those central banks can be certain that they aren’t slowing what still looks like a below-trend economic recovery from a recession in those economies.
We could well have low interest rates for longer than almost anyone now expects.
Terry,
ROFL!!! That was good!
the global carry trade lives on
Jim,
How concerned are you about the lower low we just put in. I am concerned this trend will play out with a lower high on this up move which will be followed by a break of the 1070 we just put in. Maybe a correction of 10% a more for the cycle. What do you think?
Jim, do you have a view on what this might mean for TIPS funds?
Thanks.
“9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency’s figures show”. Our $s will go to further bail out FHA.
http://www.washingtonpost.com/wp-dyn/content/article/2010/02/01/AR2010020103527.html
Jim
I bet that is why gold is shooting up. Fed will not be able to raise rates.
Jim,
Could we be looking at no Fed rate increases until 2012? Consider all the tax increases in Obama’s budget scheduled for 2011. You have to know Bernanke is aware of what happened when FDR tried to cut the budget deficit at the same time the Fed tried to raise rates: 1937.