Europe Economy

Who Will Follow Australia and Hike Rates Next?


Australia's central bank boosted its key cash rate by 25 basis points to 3.25 percent Tuesday, the first major economy to tighten since the financial crisis took hold.

Australia's move won't lead to a stampede of other banks to hike. But it may signal the end of the era of cheap money at smaller central banks.

Australia has had a "good recession" and it is helped by the fact that it has China as its main trading partner, Graeme Maxton, chief economist at The Insight Bureau, told CNBC. But the rate rise may be a bit premature, Maxton said.

"The issue is with the lag between the time that you change interest rates and the effect it has on the economy, and that could be three to six months," Maxton said. "Increasing it now is giving a signal that everything is going to get better and people will have to pay more for their mortgages."

But central banks at major economies are likely to focus more on quantitative easing and stimulus policies than improving fundamentals when looking at monetary policy, according to Maxton.

"In the US and the UK for example interest rates are likely to have to rise because the government is going to have to issue so much debt because they're going to have to pay for all the spending they've done over the last year," he said.

While some analysts do not expect more rate rises around the world this year, ING chief international economist Rob Carnell says Norway may still surprise the markets.

"I think Norway is next," Carnell told, adding that the country had a very "mild recession" and has had an aggressive fiscal policy, which helped it weather the crisis better than other nations.

Norway also has a "huge" oil fund to help bankroll the domestic economy and oil prices have recovered rapidly since March, he wrote in a research note. Norway's central bank cut rates aggressively to 1 percent and the country looks set to have an inflation problem when the recovery happens, unless the central bank acts quickly, he also wrote.

"Other economies around the world are slightly behind, I guess, where Australia is at this particular point in time," Jim Vrondas, manager of corporate business at OzForex, said.

"I think Australia is in a very unique position at present and I don't think that any other central banks around the world, particularly in Europe and England are likely to move in the same direction any time soon," he added.

Fed Mid-2010, ECB Later

The European Central Bank and the Bank of England will decide Thursday on monetary policy but analysts say any decision to hike will be taken next year.

The Bank of England may be the first of the two to raise rates, possibly as soon as in the second quarter, as the housing sector, which started to improve, and manufacturing, which is helped by the pound depreciation, are driving the UK economy, Carnell said.

The UK is running neck-and-neck with Canada for who will raise rates first among the G7 countries next year, he added.

The ECB, the "laziest" when it came to monetary easing, is likely to be the last to hike despite ECB president Jean-Claude Trichet's hawkish rhetoric at the onset of the crisis.

"I think we should be careful in projecting the Australian situation on other countries," ING euro zone analyst Martin van Vliet told "Rate rises in Europe and the US are not on the horizon yet."

Historically, the Federal Reserve has hiked before the ECB after recessions and is likely to do so at the middle of next year, van Vliet added.