The Australian media’s pre-occupation with interest rate rises every time there’s a release of economic data is approaching the illogical.
The commentary continually emphasises the rate rise impact, as if rising interest rates are bad and some sort of economic penalty. At this stage in the Australian economy’s recovery, they are nudges to keep growth on track and to control inflation before it becomes a problem down the track. The rate rises are not penalising anyone, in fact they’re supporting the recovery.
Current Australian rates are at 3.75%, and will rise to 4% next Tuesday and 5% by the end of the year, according to many forecasts — still very low by recent Australian standards.
But there’s a sense of entitlement in some of the commentaries: that home owners with mortgages and business are entitled to continuing low interest rates and none of the downside that rates at this level would normally signal: rising unemployment, sluggish or non-existent growth and poor business investment and sales.
There’s none of that happening: unemployment has peaked at 5.8%, retail sales are strong, business investment is rising and sales and profits are rebounding: all reasons for the central bank to lift rates to prevent an unchecked boomlet developing.
In fact if you had to point to just one thing that justified a rate rise next Tuesday, and again in March, it would be the Australian Property Monitors’ report on Australian home price movements in 2009. Sydney prices are up 12% in 2009, Melbourne prices by more than 18%. Bubble-like for existing homeowners!
But the media ignored any linkage and the reaction to yesterday’s CPI figures is a case in point: “Inflation fears add to pressure for rate rise” said the headline in the SMH.
“Inflation and interest rate fears sinks stockmarket” blared The Australian. Well what about moves in China to control a bubble like situation in property and lending?
There are inflation fears: they are coming from the way non-tradable prices are rising faster than tradeable prices, thanks to the surge in federal, state and local government fees and charges in the past year to 18 months. These have exceeded anything from the private sector and topped wages growth as well. Many are price increases that become embedded in other prices: power and water for example.
The ABC’s AM program was at it this morning with an interview with Christine Christian of Dunn and Bradstreet who said rising interest rates were a “great concern.” Really? Would she rather have unemployment rising, profits falling and no economic growth?
Two reports from overseas in the past couple of days underline the futility of this kind of commentary in Australia. If you want an economy that escaped the GFC, rising interest rates are a necessary part of the deal in Australia. If you don’t want rising interest rates and a growing economy and jobs, go to the UK and the US where gloom and doom remain in fashion and a genuine cause for complaint.
The UK economy finally moved out of recession in the 4th quarter of 2009 with growth of 0.1%. The outlook for Britain is for no growth other than that coming from stimulus spending by the Government and the record low rates and quantitative easing policies of the Bank of England.
And the US Federal Reserve maintained its supply of funny money to the US economy and markets this morning by keeping rates on hold at a record low of 0% to 0.25% for a ninth successive meeting and continued its view that they will remain at current levels “for an extended period of time”. Like the Bank of England, the Fed is also engaged in a bout of quantitative easing to the tune of more than $US1 trillion, although it confirmed overnight that some of its support programs will disappear at the end of next month, including currency swaps with a number of central banks, including the RBA.
Significantly any mention of the recovery in housing was omitted from the Fed’s statement. The December meeting statement included the line saying the housing sector ”has shown some signs of improvement over recent months.” No longer and overnight provided confirmation of that move with the news of a surprise and very large fall in new home sales in the US in December.
New home sales fell to a 9-month low, down 7.6% to a seasonally-adjusted annual rate of 342,000 in December from a revised rate of 370,000 in November The December figure was also the lowest since March, when 332,000 new homes were sold, and 8.6% below the December 2008 level of 374,000.
In fact the US housing market is showing signs of fatigue after a surge in sales as from March as first-time buyers took advantage of a tax credit, which had been scheduled to expire in November. That credit has now been expanded and extended until June this year and analysts had expected sales in December to pick up after November’s dip. They didn’t, perplexing the industry and economists.
Commerce Department figures showed that just 374,000 new homes were sold in 2009, down 23% from the depressed 2008 figure of 485,000 and the lowest since the department began preparing the data in January of 1963.
The housing slump, led by the subprime collapse, triggered the credit crunch and then intense recession in the US and many parts of the world. The Fed missed the importance of that in 2006 and 2007. We have to be wary that the Fed and Mr Bernanke don’t repeat that error.
US home foreclosures are continuing at record levels, home lending is weak, unemployment is adding to the pressure, as are static or falling wages. Consumer spending is weak and there’s nothing in the make up of the current US recovery to provide any comfort to US homeowners, consumers or the unemployed.
Thanks to the record low interest rates though, Wall Street’s party will go on.