By: Dr. Mike Campbell
Australia was the only major western economy to avoid going into a technical recession during the global financial crisis (defined as two successive quarters when the economy contracts) and it was the first economy to increase interest rates when the worst of the trouble had passed. Currently, the interest rate set by the Reserve Bank of Australian stands at 4.75% and has stood at this level for the passed three months. This is in stark contrast with rates in Europe, Japan and the USA which are at or near record lows. The ECB rate stands at 1%, the Bank of England rate is 0.5% and the Japanese rate is close to zero.
Australia remains concerned about inflation and there had been speculation that the rate would rise again to combat it. However, the Reserve Bank of Australia said that the high value of the Australian Dollar had acted to curb price rises somewhat. The Australian Dollar gained 10.8% against the Euro in the year to the end of February. The appreciation of the currency and the interest rates on offer have attracted substantial foreign investment in the Australian Dollar, giving it a “safe haven” status.
Australia has enjoyed economic growth because of increased demands for commodities and the relatively low unemployment level in the country. This has helped to drive domestic demand, but the other side of this coin is that it fuels inflationary pressure. It is interesting to note that the Bank of England is coming under pressure to raise interest rates (probably by 0.25% to 0.75%) to tackle inflation, yet a very much higher rate of 4.75% is perceived as being inadequate to ward off inflation in Australia. Like most developed economies, Australia has a target rate for inflation between 2 and 3%.