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Foreign Exchange

Australia: The carry trade is back

Takes lead in increasing interest rates; Australian dollar strengthens

Has a non-US rate rise ever been so closely watched? On October 6, the Reserve Bank of Australia raised the interest rate by 25 basis points to 3.25%, thus becoming the first developed nation to start tightening monetary policy since the global financial crisis. In some measure it signals a formal end to the crisis.

The move didn’t go down universally well. Ben Potter, research analyst at IG Markets in Melbourne, calls it "both extraordinary and unnecessary". In his view the RBA had plenty of time and scope to delay rate increases until after Christmas, and since there were no imbalances in the economy there was no obvious need for an adjustment.

Normalized policies
"We cannot fathom today’s decision, especially considering the global rhetoric from the recent G20 meeting that it’s too early to begin withdrawing stimulus and normalizing rates," Potter said on the day of the announcement. RBA governor Glenn Stevens argued that since Australia’s economic growth in 2010 looks likely to be close to trend, there was no argument to keep rates at such low levels and it was better to start to normalize policy.

Whatever the pros and cons of the decision, it might trigger a broader trend in capital flows: the revival of the yen carry trade and its equivalents elsewhere in the world, notably the US.

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