Australia just became the first major central bank to raise its interest rate (today, October 6, 2009) since the beginning of the financial crisis of 2008-2009.  From 3.00%, it raised rates 25 basis points to 3.25%. So what?  What does this mean, you might be asking?

Below I’ll take a look at some of the effects and significance of this rate hike – but these consequences will apply to any country raising their interest rates, not just Australia.  It’s just particularly interesting that Australia has done this so soon – and before the other major central banks around the world.

5 Reasons To Watch Out For the Consequences of the Reserve Bank of Australia Raising Interest Rates

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First, Australia now has the highest reserve bank interest rates of any of the major central banks.  The others are as follows:

Canada: 0.25%
England: 0.5%
Japan: 0.1%
Europe: 1.0%
U.S: 0-0.25%
Switzerland: 0.25%
Australia: 3.25%

Why the huge difference?  Australia is a resource-rich country.  Its economy and the strength of its dollar are based upon the sale of these real assets around the world.  This has largely kept it immune from the financial mess because it did not need to depend on the speculative financial deals and economic “innovations” that plagued Wall Street.

Australia also has a lot of gold.  Probably enough gold, in fact, to back up its entire money supply.  This would be a very interesting fact to check out insofar as the Australian dollar might even be a candidate for an informal world reserve currency replacement.

Second, it could mean Australia is seeing enough domestic economic improvement that it already wants to work to stem inflation before inflation trickles down into consumer prices.  When central banks lower interest rates, this is the same thing as “making their money cheaper.”  It makes it cheaper to borrow and it makes that country’s goods cheaper to export.  Australia no doubt already has good enough demand for its commodities, and this demand isn’t going away – not now and not in the foreseeable future.  Unlike Canada, another resource-rich country, Australia doesn’t have to worry as much about its economic ties to the U.S.  So it doesn’t have to worry so much about strengthening its currency against the US dollar.

Third, the raised rates will strengthen Australia’s dollar against the US dollar.  (Currently, one AUD buys .88 USD; if theory works, this number should rise somewhat over the near term).

Fourth, this will attract more foreign capital into the Australian dollar because foreign capital can get a better yield there than on the US dollar, for example, which pays next to nothing.  This is particularly interesting because foreign purchasing of US dollars (especially of China, the largest foreign purchaser) is showing some weak signs of slowing.  This increase in interest rates might contribute to that trend.

Fifth, this may be an early sign of the proposed “decoupling” that some analysts have been talking about.  Analysts such as Schiff have been suspecting that the rest of the world economy will improve while the US lags.  Indeed, we have seen evidence of China beginning to trade more with its local partners.  Canada, too, is slowly working to diversify its exports.

It would be wise not to assume that just because the US economy suffers, the rest of the world will automatically sink with it.  The rest of the world has learned quite a few lessons from what just happened.  It has been said that the US has an economic problem – the rest of the world merely had a financial problem due to the connected nature of its business with the U.S.  Also, countries like China in particular are actively working to become more self-sufficient in terms of resources, and this contributes to this trend.

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