Interest rates are going up again

Interest rates are going up again according to one of the economic commentators I respect the most.

According to Terry McCrann the Reserve Bank will make that very clear in its statement this week.

He predicts that the first increase could come as early as next month and says “Indeed, but for the surge in the value of the Australian dollar, the first increase could have – would have – come next Tuesday.”

He goes on to explain: The dollar’s rise is like a rate increase as it reduces the price of imports and makes it tougher for local producers to put up prices.

Even so, arguably, the RBA should start raising rates next Tuesday as inflation is already above its target ceiling and we are on the threshold of the mother of all inflation-boosting resources booms.

Even with the impact of the strong dollar – the first “de facto” rate rise – the CPI (consumer price index) numbers showed last week that inflation had started to accelerate beyond the RBA’s comfort zone.

The “headline” increase in inflation was 1.6 per cent for the March quarter – a thumping 6.4 per cent annual rate and way above the RBA’s 3 per cent ceiling.

The RBA understands that was driven by special factors, especially the floods’ impact on food prices, but even the rise in petrol prices.

It is not going to raise rates to attack what are hopefully only temporary price rises.

It focuses on the “underlying” price rises; and it was those that rose by an higher-than-expected and worrying 0.85 per cent in the quarter. That’s 3.4 per cent annualised.

Again, the RBA could live with a temporary blip above 3 per cent. The trouble is, it is already clear this is more than that.

When you drill even deeper into the CPI numbers, the prices of too many things are starting to accelerate – despite the price-cutting impact of the strong dollar and the fact that consumers are saving more than they have done since the 1970s.

The RBA has two great fears. And they are also your great fears.

First, that consumers start to spend their savings and that clashes with the investment spending for the resources boom, unleashing a demand tsunami across the economy.

The second is that the resources boom demand for skilled labour clashes with our generally low unemployment, especially of skilled workers.

And that spreads the high wages in the resources sector into the broader economy.

We are beginning to see business start to borrow again after being whacked by the global financial meltdown.

A rate rise or two would temper that and reinforce the tendency for consumers to save, not spend. Indeed, to some extent they would have to, to service their mortgages.

Just how many we get will depend on what happens not just in our local economy but the global one. Again, some of those rises could be “delivered” by a further rise in the dollar.

Last year, the RBA was “allowing” the banks to “deliver” some of the rate rises directly, with increases in mortgage rates by more than the official increases.

This year, it will be doing something similar with the dollar. Indeed, it already has.

But for the dollar’s rise we would certainly be getting one next Tuesday and probably would already have had one.

McCrann concludes by saying: Bottom line: prepare for an early rate rise and with more to come later in the year. Only GFC-like disasters can “save” you from them.

Source: Herald Sun


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