Friday 9 October 2009

Interest rate hike a time to party?

Was the rate rise too pre-emptive for Australia? I think not. A world economic recovery? Highly unlikely. An increase in the target cash rate to 3.25 per cent signifies that the Australian economy is weathering the economic recovery better than other G20 nations and is 'close to trend'. My prediction, rates could hit 4 percent by early 2010.


The rate rise was based on the following factors:

  • Strong export growth from China
  • Rising Asset prices – such as home prices
  • Lower than expected unemployment

And to a lesser extent consumer and business confidence.

The direction of the indicators are the opposite from other developed nations such as the US, Japan and Britain. The indicators give some justification for the Reserve Bank of Australia (RBA) to raise interest rates to prevent the 'economy from expanding too quickly'.

Media organisations this week reported the news with very similar headlines with constant reference to the Reserve Bank Governor, Glenn Stevens. There is very little information that can be distorted by the news however an analysts' opinion may sway influence for a reader.

Two short articles, from Wearden in the Guardian and Burgess in the Times reported on Britain's upcoming decision to set monetary policy. The articles were written with a UK-centric voice with a neutral stance to a change in interest rates.

Wearden interviewed Howard Archer from IHS Global Insight and suggested that interest rates would remain unchanged. While Burgess at the Times also reported that rates would remain unchanged to 'avoid damaging rebounding consumer confidence'.

The Bank of England's decision is based on the lack of consumer confidence, lack of growth and liquidity in the British economy. I think it would be wise to hold back any rate rises until there was better signs of recovery in the British economy.

In Reuters they reported the rate rise as a 'first among equals' and it is highly unlikely that the 'US, EU zone, Britain, Canada and Japan' are to tighten their monetary stance. However, Australia's economy is now more-than-ever reliant on selling commodities to Asian-Pacific economies. Looking to Australia may not be a good indicator of a world recovery in technology-based developed nations in the EU.

Analysts interviewed by Reuters had an optimistic view on the Australian economy and predicted that there will be cash rate increases in the next few months to a high of 4 to 4.25 before stabilising. This is consistent with my prediction of a cash rate of 4 percent by March 2010, based on favourable unemployment data and low inflationary pressures.

The Bloomberg article reported the shock of the interest rate increase. 'Only one of 20 economists surveyed by Bloomberg News forecast today's move'. This highlights the pessimism that is prevalent in the world economy and the pre-emptive nature of the RBA.

The Bloomberg article was the most extensive with background information, interviews with major Australia banks and senior economists. The article also mentioned government measures that stimulated growth in the Australian economy and driving up asset prices. I believe it is in the best interest for the government to also think about unwinding some of the stimulus measures which are likely to overheat the economy.

A prediction of a 4 per cent cash rate for Australia by March 2010 is looking more likely on the cards. GDP growth and the potential of a 'housing bubble' are strong influences. Correct me if I am wrong. But Australia's economy is based on trade with China so as long as the Dragon blows fire the Kangaroo is likely to also hop along!

Reuters
http://uk.reuters.com/article/idUKTRE5950IH20091006?sp=true

The Australian
http://www.theaustralian.news.com.au/business/story/0,28124,26172946-5018001,00.html

SMH
http://www.smh.com.au/business/rba-lifts-rates-20091006-gkv5.html

FT
http://www.ft.com/cms/s/0/e2e96a4a-b232-11de-a271-00144feab49a.html?nclick_check=1


1 comment:

  1. A good headline; introduction and class presentation. I particularly like the conclusion too. You've also made a very important point about the sources that journalists use. While the facts maybe incontrovertible, who you quote as your analyst opinion can be intended to sway the opinion of the reader. 7/10

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