Tuesday, October 06, 2009

Australia's Rate Hike

The Economist wasn't strictly right about which country would raise interest rates first, but one of their two main candidates, Australia, did come in second.

Given that the Aussie economy is one of the world's strongest, and the fact that its money supply growth is relatively high, this move is certainly justified.

Because of the dramatic 26% appreciation of the Australian dollar versus the U.S. dollar this year, Australia's economy's main challenge will however likely not be increased consumer price inflation but increased asset price inflation and increase in its current account deficit.

Partly because favorable commodity price contracts have expired and partly because of the dramatic appreciation of the Aussie dollar, the trade surpluses that Australia saw late last year and early this year have ended, and turned into deficits.


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