In line with our predictions for the BRACC countries, Australia has remained strong in the wake of the crisis. Recently the Reserve Bank raised short-term interest rates to 3.75 percent, its third increase in three months, as the economy has picked up. The U.S., in contrast, has kept the federal funds rate at close to zero percent as it struggles to stimulate growth.

 

In his latest statement release, Glenn Stevens, Australia’s Reserve Bank Governor, cited many reasons for optimism. He believes that “the risk of serious economic contraction in Australia [has] passed,” and that “growth in 2010 is likely to be close to trend and inflation close to target”. Business and consumer confidence has risen, and Stevens believes that the rate of unemployment is likely to peak at a much lower level than previously expected. Currently the unemployment rate in Australia is 5.8 percent, compared with 10 percent in the U.S. Higher house prices and a rising stock market have boosted household wealth, which should contribute to a pick-up in consumer spending—another reason for the rate hike.

 

Importantly, one of the first reasons he cites for increasing rates is growth in “China and Asia generally.” This reflects the increasingly important role of China in the global economy, as well as the increasingly intertwined nature of the global economy.