The European Central Bank last night left interest rates on hold at 1 per cent. (www.sxc.hu: P�ivi Tiittanen)
The remarkable about-face of Australia's economy is provoking envy from other developed nations still mired in recession.
Yesterday, economists were caught off guard when the jobless rate unexpectedly fell, and on Tuesday the Reserve Bank endorsed the strength of the economy by raising interest rates.
But elsewhere around the world the outlook is far from rosy. Today both the European Central Bank and the Bank of England did not think twice when they kept interest rates on hold barely above zero.
Like the United States, the 16 nation Eurozone is still reeling from the worst economic crisis since the Great Depression. Unemployment there has just risen to 9.6 per cent meaning 15 million people are out of work.
More jobs are expected to be lost in the coming months and companies are still cutting back so there were no surprises when the European Central Bank left its key interest rate unchanged at 1 per cent for the sixth consecutive month.
"The current rates remain appropriate. However uncertainty remains high and the volatility in incoming data warrants a cautious interpretation," said European Central Bank president Jean-Claude Trichet.
Speaking in Vienna, Mr Trichet reconfirmed last month's declaration that the recovery in Europe is underway.
However, he warned it could easily stall if Europe's still troubled banks fail to restore life to their fragile balance sheets.
"Overall the recovery is expected to remain rather uneven. It will be supported in the short-term by a number of temporary factors, but it's likely to be effected over the medium term by the process of ongoing balance sheet correction in the financial and the non-financial sector of the economy," he said.
Jean-Claude Trichet had one caveat - that the reality of any rebound could be exaggerated by massive economic stimulus payments.
In a message relevant to the Australian debate about stimulus rollback he signalled that a premature withdrawal could be dangerous.
"Confidence may also improve more quickly, the labour market deterioration may be less marked than previously expected, and foreign demand may prove to be stronger than projected," he said.
UK continues printing money
Also today, the Bank of England left its key rate at 0.5 per cent for the eighth month in a row. Instead of cutting rates it is sticking to a program of buying 175 billion pounds in government bonds. That is known as quantitative easing or, in colloquial terms, as printing money.
Even though British rates are on hold indefinitely, economists are already talking about how rates can be eventually raised without creating new problems.
"Well I think the main risk is that short term that everyone thinks the recovery over, we tighten too quickly and we see a sort of W emerge," said Sir John Gieve.
He is a former deputy governor at the Bank of England. He is worried that the history of record low rates that started the subprime mortgage crisis in the United States might be repeated unless some big lessons are learned.
"The main risk is that we do what the Fed did, I feel, after the 2000 dot com boom, which is cut policy rapidly, which is the right thing to do, but then only tighten it slowly," he noted.
"And I think the bank will be very aware of that risk, but I'd expect to see quite a fast tightening of policy, but once recovery is genuinely established."
A big feature of any global recovery is the fate of the US dollar, which is fast losing its lustre are the world's benchmark currency. It is now at its lowest level in 14 months against six major currencies including the euro.
Jean-Claude Trichet has backed America's strong dollar policy saying it is in the interests of all economies.
"When our friend Ben Bernanke says that a stronger dollar is in the interest of the US economy and that they are pursuing a strong dollar policy, it is an obvious judgement which is important for us and for the global economy."
In the United States, the decline of the greenback against the euro has provoked defensive comments from business news commentators.
"I keep hearing the same thing from strategists and that's: it's not the dollar; it's the anti-dollar and that's really helping the euro," said one commentator on financial news service Bloomberg.
But it is not just the euro. According to currency strategist Win Thin, the fast recovering economic wonder down under is also responsible.
"Australia for instance hiked rates this week. That was another hike down on the dollar. That's a reminder of how the interest rates are working against the dollar and continue working against the dollar," he said.
The Australian dollar climbed to a high of 90.9 US cents early this morning, and the likelihood of more interest rate hikes makes eventual parity with the greenback a real possibility.
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