Wednesday, April 19, 2006

World: Which way will interest rates go?

This is not an academic exercise: I need to re-fix the rate for my mortgage repayments. As with most Australians concerned with interest rates, this is where it hits me most.

Whereas US interest rates have been rising persistently for some time, Australia has experienced a similar period of static rates. Apart from the fact that this pushes the rates closer together, it should be expected that the Australian dollar should fall relative to the US. This has not been the case recently: it was threatening to dip below 70c US; now it’s pushing 75c. That may not sound like much, but the swing hasn’t been so pronounced for some time. I believe the answer lies in the commodity boom. Despite our efforts to diversify – and some real progress on this – Australia always rides high with commodities, being such a mineral-rich country.
And again, I’d put at least some of the responsibility for commodity surges with China.

On an anecdotal note, I remember noting with interest the size of China’s GDP growth being constantly in double digits. For decades. But until recently, there’s been no obvious effect on global activity. It looks like China’s finally hit the point where its economic activity is having a noticeable impact on the outside world.

Also anecdotally, my brother was in China recently, and noted vast stretches of highway being built - along with all associated infrastructure, such as regular service stations - seeming to go to nowhere in particular. All deserted. I noted that to get a good understanding of a situation, it pays to do the reading _and_ to visit - see the signs. In this case, I suggest they have some vast industrial project planned... somewhere. It is impressive that they can marshall the resources to develop such extensive infrastructure so far in advance of the project’s commencement. Yet there’s a danger the facilities will start to deteriorate too early in the project, so co-ordination remains an issue.
In any case, we’re starting to notice China, and consistent with burgeoning economic activity anywhere, we shouldn’t expect interest rates to come down any time soon.

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