Why the RBA didn't pull the rates trigger

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This was published 12 years ago

Why the RBA didn't pull the rates trigger

By Adele Ferguson

Update As the Reserve Bank board sweated on whether to lift interest rates today, it was no doubt weighing up the adverse impact an increase would have had on the lagging half of the so-called twin-speed economy.

This local blow, coupled with so much uncertainty in Europe and the possibility that the US could lose its AAA credit rating in the next 90 days, would have meant the RBA is making a big call by opting to focus on bottling the domestic inflation genie at this time.

So, it turns out - the RBA decided the best policy for now is to leave rates unchanged for another month at least.

Monetary policy, as we know, is a blunt instrument for curbing consumer spending - which is already down - and inflation.

True, the latest quarterly inflation figures released by the ABS last week were well outside the RBA's accepted comfort zone but much of it was due to factors such as the Queensland floods increasing the price of bananas and other foods, rising oil prices, and electricity. Wages may be on the way up, but largely that's linked to labour shortages derived from the mining boom.

Figures and surveys released week after week show that business and consumer confidence is on the slide. An interest rate hike now would sap the remaining vitality in the already struggling retail, manufacturing, tourism and agricultural sectors.

Such a move would have also sent the Australian dollar to new multi-decade highs against most other currencies. The education industry, already reporting a near-20 per cent dive in offshore visa applications, could bank on a further retreat.

Reverse half

In sum, we have two speeds in this economy, one of which is already showing all signs of being in reverse.

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A rate rise now would have exacerbated this discrepancy.

The surging dollar would further damage a retail industry battling to prevent further market share loss to internet shopping, and inward tourism numbers would likely extend their declines. The remaining non-commodity exporters would suffer more, while importers and those Australians heading overseas would find cause for applause.

To put the changes in perspective, in the past year the Australian dollar has earned the title as the second strongest currency in the world. Trend terms for tourist arrivals are lower than a year ago - the first annual decline in almost two years.

Property prices are also falling, down almost 2 per cent from a year ago, as the latest figures from the Australian Bureau of Statistics out today tell us. Housing approvals in June fell for the fifth month in six when economists had been predicting a modest recovery for the month.

There is little doubt that the 2010 interest rate increases have taken the heat out of the housing market, helping to ensure that more normal supply-demand fundamentals are in balance.

Boom and gloom

Mining may be going gangbusters for now, but China's outlook is becoming less certain - not to mention the recent near-death experiences involving European and US sovereign debt.

Add to the list of gloom, there's a carbon tax, a flood levy, weak consumer and business confidence, and slowing jobs growth.

So, with all the global and local uncertainty, the case for a rate rise at this point appears too hard to make, as the RBA has decided.

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Better to err on the side of caution, wait a month or more, and see how things play out in the US. Then adjust borrowing costs if the economy needs it.

aferguson@fairfaxmedia.com

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