October 13, 2009
The Reserve Bank of Australia (RBA) has recently raised the cash rate by 25 basis points to 3.25 percent which makes Australia the first G20 nation to lift its cash rate.
On Oct. 8, Australian Bureau of Statistics (ABS) data showed the nation's unemployment rate dropped to 5.7 percent in September, from 5.8 percent a month before, as the economy added 40,600 new jobs.
On the same day, the Australian dollar punched through 90 U.S. cents for the first time since August 2008 and the Australian share market was up by almost 2 percent.
These indicators have proved the RBA's prediction of a surge in business confidence and flagged more rate hikes.
However, prior to this, most of the economists expected the cash rate to remain at three percent until November this year and that the unemployment rate in September rose to six percent with an additional 10,000 jobless.
RBA Governor Glenn Stevens said the Australian economy's growth in the next year was now forecast to rebound which meant higher interest rates were needed to ensure the expansion was sustainable.
Stevens also said the three percent rate was "an emergency setting" and that the RBA would tighten once the emergency has passed.
While the G20 nations are struggling with high unemployment rates in the global economic recession, Australia is preparing for its next move.
Some economists predict the RBA would lift interest rates twice by the end of the year to 3.5 percent. UBS strategist Matthew Johnson estimated if the unemployment rate had peaked, then the RBA would lift interest rates to around four percent soon.
Deutsche Bank economist Phil O'Donaghoe said if Australia get through the recession with a peak unemployment rate of below six percent that would be remarkable, as it would be a better than expected result than the Australian government forecast of 8.5 percent unemployment in the May budget. Also, it would be better than the U.S. 9.8 percent jobless rate in September and the nearly10 percent unemployment forecast in the Euro zone by the International Monetary Fund.
With the current economic scenario and tightened currency policy, should the Australian government continue with the huge stimulus package?
Labor's doyen economic adviser Ross Garnaut has warned that there was danger of using "huge amounts" of public money to bail out private companies at the direction of bureaucrats.
Professor Garnaut says the government's increase in its first-home buyers subsidy reversed a crisis-induced housing correction but its phase-out, scheduled from now until the end of the year, could be "damaging".
He argues Australia's macroeconomic policy response to the global financial crisis has relied relatively heavily on one of the biggest and earliest budget expansions of any high-income country and less on lower interest rates.
On the other hand, Minister for Employment Participation Mark Arbib warned the Australian economy is not yet out of recession despite a decline in the unemployment rate.
He said the global economy is still full of uncertainties, in particular one of Australia's close partners the United States is still facing a high unemployment problem.
Next month, a series of economic targets and expectations including CCI (consumer confidence index) and CPI (consumer price index) for the third quarter of this year will be released. Usually higher RBA interest rate, lower the consumer confidence index, but economists predict there would be a nice surprise for the October index. If so, the RBA will be under pressure to lift their rates further.