Merryn's Blog

Australian interest rates are up, but don't expect Britain's to follow

Australia became the first of the G20 nations to raise interest rates yesterday. But don't expect the Bank of England to follow suit any time soon.

Australia became the first of the G20 nations to raise interest rates yesterday, having previously slashed them to prevent economic meltdown. The country moved its reserve rate from a 49-year low of 3% to 3.25% - amid "evidence the recovery is gaining momentum", said Daniel Hauk on Bloomberg.

The move took the markets by surprise (even although it was heavily flagged in the local press earlier this week so much for market efficiency). The excitement at this very visible sign of recovery helped drive markets higher across the board.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

But don't expect the Bank of England to follow suit any time soon. We share little economic common ground with the Aussies. Australia is heavily driven by commodities, and this year China has been on a huge buying spree. No wonder they're worried about the early return of inflation down under. What's more, Australia didn't get involved in sub-prime mortgages to the same extent as the UK or the US.

Whether that's because banks such as NAB missed the boat- as one senior banker who works there admitted to me recently is hardly important. The fact is that Aussie households, and therefore consumers, are in better shape than many others in the Western world. So as Jim Reid, a strategist at Deutsche Bank in London, put it: "if there was a country that would be first to hike, then Australia was always a strong candidate".

Advertisement
Advertisement - Article continues below

The UK, on the other hand, is not. Take the latest plunge in industrial production, which fell 2.5% month on month in August, the biggest fall since January. Vicky Redwood of Capital Economics summed up the figures as "dreadful". Sure, house prices may be rising- up 1.6% according to the Halifax- but all such numbers must be taken with a huge dose of salt, given the low level of transactions.

But we wouldn't bet too much on a rampant Australian recovery right now. Ultimately, the country is a bet on commodities. We're bullish on these in the long run, but in the short term we could certainly see prices falling.

With anti-dollar sentiment reaching fever pitch (as Dominic Frisby points out in today's Money Morning: Gold hits an all-time high - yet no one's interested), we may well be on the verge of another correction for the markets (at the moment, as the dollar rises, stocks decline and vice versa). If that happens, the Australian market will turn down alongside everything else.

Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/504252/brace-yourself-the-global-economy-might-be-healthier-than-it-looks
Economy

Brace yourself – the global economy might be healthier than it looks

Investors have been worried about a global recession since the start of the year. But the latest indicators suggest things might not be so bad. John S…
2 Apr 2019
Visit/501578/the-charts-that-matter-the-powell-put-is-in-place
Economy

The charts that matter: the Powell put is in place

The Federal Reserve has done not so much a U-turn as a handbrake turn on monetary policy this week. John Stepek looks at how that’s affected the globa…
2 Feb 2019
Visit/520380/investors-neednt-fear-the-rise-of-europes-green-parties
EU Economy

Investors needn’t fear the rise of Europe’s green parties

Green parties across Europe are finding the centre-right to be natural allies. That will be great for business, says Matthew Lynn.
12 Jan 2020

Most Popular

Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/520338/how-much-the-state-pension-will-rise-by-this-year
Personal finance

How much the state pension will rise by this year

While Boris Johnson promised to hold a full budget within 100 days of his election victory, many of the details of next year’s state pension increases…
10 Jan 2020
Visit/520575/20-predictions-for-the-2020s
Investments

Where will markets be in 2030? Here are 20 forecasts for the 2020s

A lot has changed in the last ten years – stockmarkets soared, technology transformed our lives and politics has changed beyond measure. Here, Dominic…
14 Jan 2020
Visit/520258/running-with-the-crowd-is-bad-for-your-finances-heres-how-to-resist-it
Investment strategy

Running with the crowd is bad for your finances – here’s how to resist it

To be a good contrarian investor, you have to avoid being swayed by the crowd. John Stepek explains how to go about it.
3 Jan 2020