We’ve won. Or so goes this morning’s breathless reportage declaring the local chapter of the GFC over as private equity sloshes and consumers again begin to charge around Myer (and the Myer float) with serious intent. But despite recovering retail sales, job ads and housing finance figures, the positivity over the RBA’s decision to end the cutting cycle and raise rates to 3.25% was far from unanimous — Heather Ridout was spewing and AM accused Glenn Stevens, who bears a strong physical resemblance to the Grinch, of “spoiling Christmas”.
While Stevens was typically cautious in his accompanying statement yesterday, repeated references were still made to indicators that probably aren’t reflected by economic fundamentals. Growth is stagnant and unemployment will continue to rise.
So did the fearlessly independent minds at the RBA get it wrong? Could the governor have jumped the gun just to be seen to be doing something? Crikey asked a group of leading economists for their expert opinions.
Alan Oster, National Australia Bank: We didn’t think the RBA would move this early — we expected them to start in November. If I were in Glenn Stevens’ position I probably wouldn’t have done it. The RBA clearly have a view that the economy is in a recovery phase and that you don’t want to keep rates at emergency levels in that climate. They’re also trying to lean a bit against the expanding housing market and will probably go further again in November.
The idea of the rate rise is to take pressure out of the household sector and impact discretionary spending. The other result is that you push the Australian dollar higher and that could effect exports. But the real risks could be that the RBA is responding to growth in the economy that isn’t really there. There’s been no growth in the current quarter and the economy is certainly not back on track. We’ve basically just dodged a bullet.
Adam Carr, Senior Economist ICAP: I think it was the right decision because the Australian economy is very healthy and by next year will be firing on all cylinders. But this brings up the prospect of inflation — keeping in mind that currently core inflation is well above the normal band. But the consequences of inflation are serious and we will inevitably be heading for another recession if it gets out of hand. The RBA’s decision to hike in baby steps is therefore a wise move.
Interest rates are still the lowest they’ve been since the 1960s and an increase in the cash rate of .25 per cent is not really going to change behaviour. If I was thinking of going to the market for funds the RBA’s decision isn’t really going to have an impact. It’s going to be a long time before interest rates will be at a point where they’ll be even remotely restrictive.
Rory Robertson, Macquarie Bank interest rates strategist: Only Harry Hindsight will be able to say for sure whether the RBA’s decision yesterday was correct. The RBA simply judged that its 3% “emergency” rate that was appropriate in the economy’s darkest hour now seems a bit low. It is recalibrating policy because the big recession it feared failed to show up — it was replaced by a small one and now there are signs of recovery.
From here, good news on the economy will continue to be bad news for interest rates. The RBA, however, will move one careful step at a time because it has begun hiking — for the first time — before unemployment has turned down, and before full-time unemployment has stopped falling. In moving relatively early – in doing what it thinks is the right thing to avoid the development of unhealthy economic “imbalances” – the RBA is taking the risk of looking rather silly if somehow everything eventually turns to custard.
Warren Hogan, ANZ acting chief economist: It isn’t really a matter of whether they were correct or not; only time will tell. What they have decided to do is to move on rates early and in doing so there is a good chance that this initial upward adjustment will only be small. While the RBA moved earlier than I thought they would, it doesn’t change my view on the total amount of tightening required in this first phase. I still believe that the right cash rate for this economy in early 2010 will be around 4%.
On the negative side, I will be revising down our dwelling construction forecast slightly, which of itself isn’t helpful because of the undersupply of housing. But that isn’t the RBA’s fault. It is the high cost of development of residential property, largely the domain of state and local governments, that should take the blame. I think consumer spending will be adversely impacted as well.
The early move increases the odds that less will need to be done over the next year or so – that is a good thing from the perspective of debt holders. Higher rates will also be supportive of those on fixed incomes – particularly retirees. A stronger Aussie dollar will help importers and cheapen imported capital equipment.
John Quiggin, The University of Queensland: I think the RBA was right to raise rates — it had to come soon because obviously the economy is recovering much more quickly than 6-months ago due to the uptick in the global economy and the Rudd government’s fiscal stimulus. The obvious impact will be on housing markets and this move will cool housing markets down. The recovery in house prices is still a serious danger for the economy. We have to start acting now to avoid a house price crash.
We’re now likely to see a return to normal settings both in monetary and fiscal policy more rapidly than might have been expected. It’s an indication that we need to move back to normal levels, in order to be prepared for future risks.
If things keep going as they have been, we’ll almost certainly see another rate rise. But if the economic news in the next month is bad then the RBA will be taking it pretty slowly on the way up.