Tuesday, February 12, 2008

"Every further rate rise takes Australia closer to the economic abyss"

My colleague Shane Wright, economics editor of the West Australian:

Only a collapse in the Australian economy will spare homebuyers, businesses and the Federal Government more interest rate pain this year.

That’s the only view to be taken from the Reserve Bank’s most hawkish statement on monetary policy released yesterday. As one economist said, the bank has dipped a brush in blood and painted on a wall — interest rates will rise in three weeks.

The inflation problems are many.

Wages are starting to rise, the terms of trade will increase, there are not enough workers for an economy going at full tilt, businesses still struggle with capacity constraints, tax cuts help consumers spend like there’s no tomorrow and not even a US recession is likely to slow Australia.

The Reserve holds out some hope that its previous rate rises, together with increased business investment which has eased export bottlenecks and a global slowdown may take some sting out of the inflation pain.

But it knows this is a forlorn hope...

Only a collapse in the Australian economy will spare homebuyers, businesses and the Federal Government more interest rate pain this year.

That’s the only view to be taken from the Reserve Bank’s most hawkish statement on monetary policy released yesterday. As one economist said, the bank had dipped a brush in blood and painted on a wall — interest rates will rise in three weeks.

The inflation problems are many.

Wages are starting to rise, the terms of trade will increase, there are not enough workers for an economy going at full tilt, businesses still struggle with capacity constraints, tax cuts help consumers spend like there’s no tomorrow and not even a US recession is likely to slow Australia.

The Reserve holds out some hope that its previous rate rises, together with increased business investment which has eased export bottlenecks and a global slowdown may take some sting out of the inflation pain.

But it knows this is a forlorn hope.

Its inflation forecasts show the consumer price index not coming down to the top of its target range until June 2010. In fact, its forecast horizon doesn’t extend long enough to take in an inflation rate starting with a two.

While some of the blame can be sheeted home to the previous government and its failure to curb spending, the Reserve also must take some responsibility.

The bank must be kicking its collective self that rates were not lifted even higher last year, and that it did not warn the Howard-Costello government against further tax cuts.

There may have been some political pain in such a move but the economic pay-off would have been seen by now.

Unfortunately for the bank, it is now in the position where it knows every further rate rise takes Australia closer to the economic abyss.

A hard landing is growing more likely, one that will knock the economy hard.