Rate Hikes: Sooner Rather than Later

When the Reserve Bank of Australia raised its key interest rate on Monday, triggering a global stock market rally after two weeks of losses in North America, one of the conclusions drawn from the move was that the global economy was recovering.

However, Morgan Stanley’s Joachim Fels believes there is another lesson to be learned here: Central banks will be willing and able to raise interest rates before economic growth has kicked in if there are concerns about low rates driving asset prices too high.

In the case of Australia, the central bank said that “dwelling prices have risen appreciably over the past six months.” Mr. Fels pointed out that Norway could be the next to raise rates, and also because of surging house prices there.

“Some time in the new year, if risky assets keep feasting on the liquidity glut, equity and house prices could come into focus as runaway asset price inflation creates a dilemma for central banks: hiking into a weak economy could stall or even reverse the recovery; but staying on hold for too long would risk inflating the next bubble,” Mr. Fels said.

“With the ‘mop up after the bubble bursts’ orthodoxy having fallen victim to the crisis, at the very least the risk exists that central bankers will be forced to sound hawkish – even if not ‘leaning against the wind’ outright.”

Comments

[Dave Wrixon:]

The truth is that some economies are going to recovery strongly and others just aren't going to recover at all. No prizes for guessing which category the US fits into.

Oct 08 07:13 PM