Wednesday, April 02, 2008

Forget about Reserve Bank rate rises. At least until November

Australia’s Reserve Bank believes it may have fired its final shot in the war against inflation and has declared it has no plans to increase interest rates further.

The declaration, released yesterday after a board meeting that decided not to lift rates was embraced by the Treasurer Wayne Swan as a “welcome reprieve for working families”.

The Bank’s statement indicates that while it expects Australia’s rate of inflation to remain high when the next figures are released in three weeks time, it expected it to decline after that.

A high inflation result in the March quarter figures to be released on April 23 would not trigger a rate rise in May...

The statement describes the tightening in financial conditions to date as “substantial” and says that tightening is “working to foster the moderation in demand growth that will take pressure off inflation”.

It is understood that even a high inflation result in the June quarter, to be revealed on July 23, will not trigger a rate hike in August.

The Bank believes that it has given the economy enough of the unpleasant medicine that it needs in order to contain inflation, and it now needs to move to the sidelines and watch how that medicine works its way through the system.

Recent indications are encouraging. Both consumer confidence and business confidence are down after four interest rate hikes in eight months, and personal debt has been wound back.

The Bank will be examining consumer spending, spending on housing, and import growth to get an early indication of how hard its rate hikes are biting.

Other data, such as employment growth and the inflation rate itself are regarded as lagging indicators unable to give a timely indication of the way the economy is heading.

The Reserve Bank’s four interest rate rises in the last eight months have been augmented by at least two more by the major banks, taking the total increase in mortgage rates since August to abound 1.4 percentage points.

The Bank believes that those increases will dent the economy, but it can’t be certain about by how much.

Further rate increases while the effects of the latest ones were yet to emerge would run the risk of going too far, especially while financial market sentiment remained “quite fragile”.

The Treasurer Wayne Swan signaled that for his part there would be no let up in the war against inflation, saying that under the previous government too much of that responsibility had fallen to the Reserve Bank.

“The government had not been playing its role. The consequences of a lack of discipline when it comes to fiscal policy in recent years are there for all to see. We’re dealing with that. We’re dealing with that in the budget process,” he said.

He implored Australia’s private banks not to take the fight against inflation into their own hands by lifting their borrowing rates again independently of the Reserve, saying that Australian families were under great financial pressure.

“The banks must take that into account,” he said.

The Opposition Leader Dr Nelson in Brisbane on his listening tour described the Bank’s decision was a “welcome relief”.

“Australians are suffering with cost of living pressures, petrol, groceries and interest rate rises. Since Mr Rudd and Mr Swan came to government, we have had two official rate rises and two unofficial rate rises. Small businesses have been telling me that in the last few weeks, and especially in the last couple of days, consumer confidence has plummeted.”