It may signal vote of confidence in global recovery

By CHRISTOPHER S. RUGABER

Associated Press

WASHINGTON -- A move by Australia's central bank to raise its benchmark interest rate, the first major economy to do so since the financial crisis worsened last fall, may signal a vote of confidence in a global recovery.

Still, most economists don't expect the Federal Reserve or other major central banks to follow Australia's lead and raise rates any time soon. Australia's economy is healthier than the U.S. or European economies, due to rising prices for metals and other commodities it produces.

But the decision by the Reserve Bank of Australia to reverse some of the steep rate cuts it implemented last year is a sign the economy is improving in parts of the world, analysts said. A healthier world economy could help the U.S. by boosting exports.

"Recovery is starting to take hold" in Asia, said Jay Bryson, global economist at Wells Fargo Securities. "Very low interest rates there may not be necessary for much longer."

Australia's central bank governor, Glenn Stevens, said Tuesday the risk of "serious economic contraction" in that country had passed. Australia is benefiting from a strong rebound in China, a major trading partner that imports huge amounts of Australia's iron ore and other minerals. Its economy grew in the first two quarters of this year, when the U.S. economy remained mired in recession.

The move helped boost the U.S. stock market. The Dow Jones industrial average jumped about 132 points, while broader indexes also increased.

Australia's move comes after the International Monetary Fund said last week the global economy is recovering faster than expected. The IMF raised its estimate for world economic growth to 3.1 percent in 2010, from a previous forecast of 2.5 percent.

Among major economies, Norway is the most likely candidate to raise rates this year, analysts said, as high oil prices bolstered its economy. The country's central bank could boost rates as soon as its next meeting on Oct. 28.

South Korea is another likely candidate, according to Benjamin Reitzes, an economist at BMO Capital Markets in Toronto. The country's central bank has already noted rising home prices and said it might raise rates in response, he said.

Asia is recovering so quickly that some analysts worry it could face asset bubbles and a spike in inflation if governments wait too long to withdraw stimulus measures. Rising food prices already are becoming a problem in India. HBSC economists said in a report Tuesday that South Korea, Indonesia and the Philippines are particularly vulnerable to an inflation blowout.