Australia's rates gamble

The Reserve Bank's decision to raise interest rates suggests a degree of confidence that the worst of the GFC is behind us, but there's much evidence to suggest this is a dangerous view.

Australia is not decoupled from the rest of the world. Yes, we have experienced a somewhat softened blow in comparison to comparable developed economies, but we are still extremely dependent on the global economy – this is why today's interest rate hike is premature and dangerous.

Australia is in a privileged position, benefiting immensely from the China growth story and its appetite for commodities; that is undeniable. And it's not likely that the Chinese economy is going to fall over any time soon. But Australia and China do not live in a cosy vacuum of immunity. The US economy is in dire straits and the potential impact of this on Australia in the coming months cannot be ignored.

Three high-profile, respected, US-based economists have told me in interviews in the last month that US is in serious, serious trouble. John R Talbott told me that we're at the bottom of the first V of a W-shaped downturn, meaning a second, extreme dip is yet to come. Michael Hudson told me that a rise in Australian interest rates would result in a financial raid that would dramatically increase the tax burden on Australian taxpayers. And Lacy Hunt told me just this week that the practices that resulted in the global financial crisis are being repeated, with US housing bodies encouraging young families into the housing market when prices are still inflated. He added that the US economy will suffer for the next 10 to 15 years.

So why has Australia decided to raise rates, essentially demonstrating it believes the worst is over? This move is totally at odds with the stimulus measures the government has relied on and which Glenn Stevens himself said were so effective in helping Australia battle more serious fallout from the global downturn. And, as foreshadowed by those in the building sector, including one of Australia's most successful property developers, Harry Triguboff, this could also derail progress made in the building sector and mortgage market.

In his commentary today, Robert Gottliebsen demonstrated, using Xstrata and BHP, how there is a split in opinion over whether the China growth story can carry Australia, and indeed the world, through the crisis. BHP appears to believe there are tougher times ahead, while Xstrata is bullish, believing China is the key to our redemption.

It appears that the Reserve Bank is aligning itself with Xstrata with this rate rise, thus denying the potential impact the worsening US economy could have on our future.