Wednesday, May 04, 2011

Going Up. The Reserve prepares to raise rates

The Reserve Bank believes inflation has troughed and it will soon have to lift interest rates, possibly next month.

The Bank’s change of heart emerged during a three-hour board meeting that resolved to leave the cash rate steady at 4.75 per cent but to be prepared to lift it without waiting for the next quarterly inflation figure.

The consensus of the meeting was that last week’s unexpectedly high inflation figure showed the underlying rate had troughed at 2.25 per cent and was set to climb.

There would be no point in waiting for confirmation from the next set of inflation figures due in July which would be dated by the time they were considered at the Bank’s August board meeting...

The Bank would monitor employment, wage and consumer confidence and spending figures and act early if they appeared to confirm inflation was moving.

Bank staff believe the underlying inflation rate of 2.25 per cent leaves very little room for upward pressure if the Bank is to meet its long-run target of keeping the inflation rate to 2.5 per cent.

Another rate rise, the Bank’s first this year, would bring its cash rate to 5 per cent and push most standard variable mortgage rates above 8 per cent, adding a further $50 to the monthly cost of servicing a $300,000 mortgage.

The board resolved not to be dissuaded by news of negative economic growth in Australia's March quarter national accounts due to be released ahead of its next board meeting on June 1.

“The natural disasters over the summer have reduced output in some key sectors and the resumption of coal production in flooded mines is taking longer than initially expected,” it said in the statement released after its meeting.

“It is likely this caused a decline in real GDP in the March quarter. Production levels should, however, recover over the months ahead, and there will be a mild boost to demand from the rebuilding efforts as they get under way. Over the medium term, overall growth is likely to be at trend or higher.”

The bank believes there are already signs of rising inflation, set to be made worse by the coming investment boom.

A Deloitte Access survey released today identifies $767.5 billion in large investment projects underway, almost half of them in mining. Transport, utilities and communications projects account for about one quarter of the total with manufacturing accounting for less than 5 per cent, most of it related to resource projects.

Deloitte Access partner David Rumbens said the two-speed investment profile was a complete turnaround from the start of the last decade when manufacturing had a clear lead over mining with close to double its investment.

The Reserve Bank is keen to signal that it will pay little attention to the two-speed nature of the economy in deciding to move rates, being guided almost solely by its inflation target.

A rate rise at its next meeting in next meeting in June would come just four weeks after next week’s budget and perhaps inadvertently be seen as a judgement on it.

Treasurer Wayne Swan said an average family with a $300,000 mortgage was still paying nearly $160 less per month in repayments than they when labor came to office in 2007.

“That’s a saving in the order of $1,880 a year,” he said. “It’s extra money that’s important given the cost of living pressures many families face.”

Published in today's SMH and Age

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