A man speaks on the phone as he stands on the balcony above the DAX board at the Frankfurt exchange Oct. 6, 2009.PAWEL KOPCZYNSKI
It was the quarter-point rate hike heard 'round the world.
The first interest rate increase by a major economy since the financial crisis had a snowball effect in global markets as investors, taking the move as a harbinger of recovery, drove up stocks, gold and some currencies.
Australia broke ranks with other industrial economies Tuesday in a policy reversal that sets the stage for other central banks to follow suit, as they, too, become more concerned with preventing an outbreak of inflation than propelling economies out of recession.
The Reserve Bank of Australia boosted its key lending rate by a quarter of a percentage point to 3.25 per cent, and Governor Glenn Stevens signalled that further hikes could follow.
The move reverses a series of sharp cuts made in the wake of the collapse of Lehman Brothers last September and the ensuing credit crunch that slammed strong and weak economies alike and brought international trade, Australia's lifeblood, to a near standstill.
The central bank's unexpected move was widely viewed in the markets as a confirmation that the global economy is on the mend. Investors rushed into the Australian dollar and other commodity-based currencies, including the loonie.
Gold climbed to a record $1,043.20 (U.S.) an ounce and the U.S. dollar plunged, as less-fearful investors rowed away from what they had considered a safe harbour in uncertain waters.
The key question now is whether other central bankers looking at stabilizing employment and brightening growth prospects will similarly move to reverse historically loose monetary policies.
"Don't worry about the Bank of Canada doing the same thing," Carl Weinberg, chief economist at High Frequency Economics, said in an interview from London. "I don't think that's on the agenda."
Australia was widely expected to be the first of the industrial countries to tighten monetary policy, because it escaped recession and was wrestling with stubborn inflation even before the global downturn as a result of rising wage pressures in a tight job market.
Australia's jobless rate has climbed to 5.9 per cent from a 33-year low of 4.2 per cent before the global crisis. But even this level is not high enough to ease inflation pressures, Mr. Weinberg said. Not even a deteriorating trade balance stopped the bank from acting.
The move came as a surprise to the markets only because of the timing. Analysts thought the central bank would wait at least another month until it could analyze the latest quarterly jobs data.
Most central bankers are eager to shut off the flow of easy money and begin siphoning the stimulus cash out of the system now that financial order appears to have been restored. But apart from a handful of stronger economies, such as Norway's, they are constrained by tough economic conditions and deterred by concerns about deflation. No one was eager to be the first one back in the tightening camp.
Some policy advisers have urged governments and central banks to co-ordinate their exit from easy monetary policies to keep fragile financial markets from destabilizing. But central bankers have long been adamant that they must respond individually to domestic conditions.
"We continue to think that the Bank of Canada will be one of the early movers [on rate rises]in the grand scheme of things," said Millan Mulraine, economic strategist with TD Securities in Toronto. "But we don't see them moving until perhaps the end of next year."
Bank of Canada Governor Mark Carney has stated the benchmark rate should remain at 0.25 per cent at least until the end of next June to maintain the 2-per-cent inflation target, but has repeatedly called this "a conditional commitment."
Typically, policy makers elsewhere are saying nothing publicly about the potential chain-reaction effect of the Australian move.
"It's not our policy to comment on the interest rate decisions of other central banks," a Bank of Canada spokeswoman said.
Australia and Canada share certain economic and financial similarities. They have both been huge beneficiaries of the commodities boom and their financial systems escaped the worldwide mess relatively unscathed.
But they also have sharp differences. The Australian economy has remained stronger than most of its industrial peers, and it has benefited mightily from closer ties to China. But it has also been beset by inflation woes that Canada has escaped.
Canada has also fared better than the U.S., Europe or Japan, but it did fall into a recession and its recovery depends heavily on a rebound in U.S. demand.