Leading commentator believes interest rates will rise next Tuesday

The latest C.P.I. figures were released yesterday and it shows that Australia has an inflation problem.

Underlying or core inflation has been running at more than a 3.5% per annum pace over the last six months and this above the RBA’s target.

This has led two of the smartest commentators I follow to predict further interest rate rises – possibly as early as next week.

In his great blog Christopher Joye  http://christopherjoye.blogspot.com/ says:

As I have unwaveringly forecast–and reiterated only a week ago–we will get at least one to two rate hikes this year (in fact, we should in theory get three).

Forget rate cuts absent a total global meltdown. Anyone suggesting such refuses to accept our inflationary (and full employment) reality. 

Today one of Australia’s smartest economic commentators, Terry McCrann, has made a very big call for next Tuesday. He believes interst rates will rise next week to keep a lid on inflation:

Rate rise is coming
Terry McCrann  July 27, 2011

THE Reserve Bank really has no choice. It must lift its official cash rate next Tuesday; and it will.

But don’t blame RBA governor Glenn Stevens. Blame Julia Gillard and Wayne Swan for strangling the productivity we need to sustain strong growth in the economy without inflation pressures.

Now a rate rise will come absent only some form of global financial meltdown before Tuesday.

And the warring politicians in the US still failing to agree to lift their debt ceiling would NOT of itself constitute such an event.

Indeed, even the US moving into some form of `default’ – whatever that quite means – would not of itself be sufficient to stop the rise. We would have to see real consequences – meaning chaos – in global financial markets.

Arguably it is now shown that the RBA should have hiked in May, after the March quarter inflation numbers pointed to the first troubling signs of accelerating underlying inflation.

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To stress, that’s a number that removes the distorting boost to inflation from the floods at the start of the year – and especially the banana prices that a desperate treasurer was grasping at yesterday.

The RBA held its hand primarily because of signs of weakness in the non-resources side of the economy. But also because of the risk of Greece and/or the US triggering GFC Mark Two.

After the 0.9 per cent underlying inflation number for the June quarter, an immediate rate rise should be a done deal.

The RBA is charged with keeping inflation in the 2-3 per cent range. As inflation hawk Christopher Joye argues, that implies a real target of 2.5 per cent.

The 0.9 per cent annualises at 3.6 per cent. Even taken with the 0.85 per cent of the March quarter, the annual rate is still 3.5 per cent – and that’s solid for a full six month period.

The inflation tiger is out of the bag and running, before we really get to the actual spending of the resources investment boom which is going to add so much stress to demand for skilled labor, and so wages and inflation.

But will the RBA, should the RBA, hike into the soft – or worse? – economy complained about by retailers?

In his important speech on Tuesday – it’s important to understand, before he had any knowledge of yesterday’s inflation figures – Stevens argued that softening was achieving the necessary `making way’ in the non-resources economy for the resources boom.

But the clear inflation pressure means he can’t assume that will continue. China is pouring a tsunami of money into Australia. We could all too easily see inflation kicking up above 1 per cent a quarter as it did in 2008.

That brings us back to Gillard and Swan and their imposition of old-is-new again rigidities in our labour market and work practices; their pouring of billions into wasted or low-return projects like schools halls and the NBN.

And then the ultimate anti-productivity measure – their attack on our cheap, reliable and available electricity, the absolute foundation of productivity in any economy.

Most economists yesterday were opting for the `wait-until-November’ option. In case Europe or the US implodes. In case our (non-resources side of the) economy really is sliding into recession.

That’s exactly what got us to August when the RBA should have hiked in May. It can’t afford to stretch the wait to six months.

Stevens actually has a very pungent precedent as a guide. What was among the most courageous rate rises I’ve seen – in both the `yes Minister’ and normal meanings of the word.

In November 2007, he’d been governor for barely a year. He became the first to hike in the middle of an election campaign. The statement could have been written for next Tuesday.

“Inflation in Australia has increased. Underlying inflation was 0.9 per cent in the September quarter and close to 3 per cent over the past year,” Stevens said in 2007.

“By the March quarter of next year, both headline and underlying measures of inflation are likely to be above 3 per cent,” he added.

Now true, back then, the RBA was also seeing the strong growth in the economy that seems lacking now.

But it’s also worth noting that back then it was lifting its cash rate to 6.75 per cent. Tuesday will only lift it to 5 per cent.

Source: www.news.com.au


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