Wall St was down 94 overnight, its biggest fall in a month, while the local market is down 66.
Blame the states when RBA lifts rates
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When the Reserve Bank lifts interest rates next Tuesday and again either in December or February, you can blame the lazy, fat, rapacious State Governments — especially in NSW and Darwin — for waving through outsized price rises for gas, electricity and water. Forget all the barking from the interest rate hounds in the finance commintariat about “rate rise looms, perhaps half a per cent” and focus on the fact that nearly all the 1% rise in the cost of living for the September quarter can be blamed on those higher utility charges, especially for electricity. The housing group of costs was the major influence in driving the rise: housing costs jumped 2.9% in the quarter, the highest by far. And the Australian Bureau of Statistics had no doubt when it said in its commentary:
While it said the “most significant offsetting price falls were for other financial services (-2.3%), vegetables (-5.6%), fruit (-5.4%), pharmaceuticals (-4.4%) and audio, visual and computing equipment (-2.2%)”. “Over the 12 months to September quarter 2009, the housing group rose 5.5%, with the main contributors being rents (+6.2%), electricity (+15.6%), water and sewerage (+14.9%) and house purchase (+1.7%).” Over half that 5.5% rise came from the September quarter’s 2.9% jump. In some states those utilities are state owned (NSW for example), in others they are privately controlled (Victoria, for example). But in every state the Government or a so-called independent pricing review tribunal or organisation vets price rise applications and either allows them, or rejects them. Consumer price inflation was up a bit stronger than expected in the June quarter at 1%, giving an annual rate of 1.2%, but that is not the true picture. That is double the 0.5% rise in the June quarter, when the annual rate was 1.5%. And much of the rise is down to the higher power, gas and water charges waved through by the states. As we saw in the Producer Price figures on Monday, many of those price rise applications were approved (in NSW it’s part of rebuilding the broken finances of the power business prior to privatisation). The ABS said then that the biggest influence on the rise in the final stage PPI was “mainly due to price increases in electricity, gas and water (+12.1%)”. That helped boost (along with the higher bakery costs) the domestic final stage PPI by 1% in the quarter. The Reserve Bank’s preferred measures, the Weighted Median and Trimmed Mean both rose at a slightly slower rate than the headline figure in the quarter up 0.80%. But for the 12 months to September, both were up 3.8% and 3.2% respectively. That’s down the levels in the June quarter, but not by quite enough to calm the nervy folk at the RBA. So, according to most of the rate chasers in the markets, 0.25% looms as the most probable size for RBA’s Melbourne Cup day rates announcement. But with the cost of living running hot, a 0.50% rise “to send a message” to business and state governments can’t be ruled out. |
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7 Comments
Now do people see how increased costs of an emissions trading scheme could cause some grief? The increase in prices for more expensive energy costs will go straight into the CPI, causing inflation. The reserve will increase interest rates to combat it and eventually equilibrium will be restored. But that’s over the long run. The years in between will be, as Keating would say, the recession we will have to have.
Glenn -
I and many like me won’t BLAME anyone when interest rates rise. We’ll be glad to see it. Because we actually lend money to the banks; we don’t borrow from them. And we’re a majority. That’s the self-interested factor . More broadly, lending far too much at rates that, thanks to people like the supposedly all-knowing Alan Greenspan, were far too low was what the world into the bloody mess of the last couple of years in the first place. Let mortage holders feel at least a tiny bit of doubt about whether borrowing up to the eyeballs again is the right way to go. And let’s not have a learn-nothing media running scare campaigns about ‘high interest rates’ to enable idiots to do it all over again.
The schizophrenia of Crikey’s conflicting messages - we must make the community pay more for their energy usage so that they will correct behaviours if we have any chance of saving the planet from a horrendous climate change - BUT - any government that allows increases in energy costs is “rapacious” and will make the community pay higher interest rates (which we really shouldn’t want to remain at emergency level lows for too long anyway) .
I still fail to see why we need an interest rate raise because we are now spending more of our non-discretionary spending on water/sewerage, electricity etc. It is not like we have a choice. If you live in Victoria (perhaps other places as well), reducing consumption does not drop the bill much anyway, because so much of the bill is “supply charges”. Fair enough if the Reserve Bank looked at discretionary spending (holidays, computers, dinners out, booze, even cars and fuel), but you are not going to make people spend less on essentials such as water or rent by increasing interest rates. It just makes it even more difficult for the poor to make ends meet and feed quality food to the family. And if it is the overheated housing market they are worried about, it is a bit late to take the price bubble out of housing prices using interest rates. Far better to tackle this one by changing the tax system.
The rise in energy prices is mostly due to transmission and distribution costs and to a lesser extent wholesale energy and RET costs.
NSW isn’t going to sell the transmission or distribution business, just the generators and retailers. So your charge of pumping the value up is a bit uninformed.
ETS will cause an initial inflation spike (ala GST) and probably some on-going rise. However it will also lead to the RBA changing its target band up by a half percent of so to account for this. The current band of 2-3% is quite arbitrary and the target band used is country specific.
I thought the 2-3% inflation target band was based on the long term annualised economic growth figure for Australia. The Reserve allows prices to grow at the same rate as the economy… Unless GDP growth is consistantly above this, I don’t see them changing it anytime soon.
@LindsayB: Whether the cost of discretionary or non-discretionary spending rises doesn’t really matter – if you assume people are going to keep buying exactly the same amount of non-discretionary goods, then they will have to take the money out of their discretionary spending. Pretty much the same as if the (direct) price of discretionary goods had increased (indirectly it already has, via the opportunity costs).
Claiming that the rate rises make life harder for the poor to buy necessities implies they are borrowing to finance their basic purchases?!
I think the arguments you are trying to bring have little bearing on interest rate policy.
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