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.

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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".

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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.




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