Today at 9.30am, the Reserve Bank announced a 25 basis point rate hike. The key sentences in its announcement were:

The decision was taken against a background of continued expansion in the global economy and further evidence that inflationary pressures had increased.

Domestic demand has been expanding at a relatively strong pace against a background of limited spare capacity. Labour market conditions have remained tight and businesses are reporting high levels of capacity usage. While there have been some tentative signs of moderation in the demand for credit recently, the overall pace of credit growth has remained strong.

Alan Wood puts the political part of the case in today’s Oz:

If the RBA doesn’t put up rates now, John Howard said the other day, there is a danger of another boost to inflation and an even bigger rise in rates down the track. That, he added, would not be in anybody’s interest.

Certainly not in the interest of a government with an election to win next year and interest rates undoubtedly a sensitive political issue.

This rate hike is likely to hurt many Australians, especially those suffering from the “worst drought in a millennium”. According to the announcement, the RBA “took careful note of the likely economic effects of the drought, which will lower the supply of rural produce, reduce farm incomes and may temporarily affect prices for some foodstuffs”.

The Government has stepped in with an expansion of the interest rate relief package for drought-affected businesses, previously only available to farmers. According to today’s Age, the expansion means that:

Businesses can apply for money to meet daily living expenses at the rate of the Federal Government’s Newstart allowance. They can also get subsidies worth half their interest payments for the first year and 80% of interest for every year after, up to $100,000 a year or $500,000 over five years.

In case you missed it due to Cup Day carousing, Henry’s case for a pre-emptive strike has been ignored. This means the debate over the need (or lack of need) for further rate hikes will stretch into 2007.

Read more at Henry Thornton.

Peter Fray

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