Australia was one of the first nations around the world to begin raising interest rates after the recent global economic crisis. They hiked their interest rate, then paused, as questions loomed over the viability of the global recovery.
South Korea was another nation to lead the world with interest hikes, and they just recently increased their key interest rate even further, to 2.25%, in a vote of confidence for the global recovery. Taiwan and Thailand are other Asia-Pacific nations who have increased rates as well, feeling comfortable enough with their economic growth to ease back their monetary stimulus.
Australia's central bank is now pondering a new interest rate increase, but aren't just looking at their domestic economy for clues, but Europe's as well. As such, Australia is awaiting the outcome of Europe's bank stress tests before reaching a conclusion about the state of the world economy:
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“The important question for the board at its next meeting would be whether the new information materially changed the medium-term outlook for inflation,” the bank said in minutes of the July 6 meeting released in Sydney. Board members also said Europe’s tests, due this week, have “the potential to have a significant impact on financial markets and global confidence.”
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Members also said the banking stress tests will result in “important announcements about the health of the European banking sector, which had the potential to have a significant impact on financial markets and global confidence,” today’s minutes showed.
Basically, the 'real' global economy appears healthy to Australia. Export income is strong, unemployment is low, and overall the government has begun to see indications of private demand replacing the need for fiscal stimulus.
Their concern is that problems in the European financial system could somehow spill over into the real, global economy and abort the global recovery. It's a similar concern to that voiced by the IMF recently when they hiked their global GDP forecasts, and is probably shared by much of the world outside of the U.S., Europe, and Japan.
Thus we'll say this -- Europe has presented the latest wall of worry for markets to surmount, thus if Europe's financial problems can remain contained to Europe, even if economic growth stagnates within Europe, then watch the global economy outperform market expectations.
