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Cup day rate rises - a safe bet?

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If the scary interest rate talk of three rises in a row and even a whopping half-a-per cent rise is under starter’s orders for Cup day, don’t get too stressed. This outcome is not an odds-on certainty. Even the rapid rises could become gradual and measured rises as economic data justifies it.

Yesterday, the Reserve Bank played show and tell with the minutes of their most recent meeting which brought the 0.25 per cent rate rise. They revealed that there was a debate about whether it was premature to be lifting rates.

That’s a healthy sign that some board members, people regarded as smart enough to sit on the central bank of Australia’s board, pondered whether raising rates now was a bit of a risk. That means the rise was not a unanimous decision, at least at the beginning of the meeting.

What the…?

Critics of the early rate rise and the unbelievable acceptance of the outrageous idea that we could see a half a point rate rise on Cup day, are thin on the ground.

We know Dr John Hewson thinks the rate rising before unemployment peaks is, as he said, “a bit bolshie” while the RBS Morgans chief economist, Michael Knox, on SWITZER on Monday night did not criticise the bank’s move but did imply that it all seems a bit fast.

And, I can bet just about every small business leader — from retailers to manufacturers to tourist operators — would be doing a Rove-like “what the…?” at the thought of a 0.5 per cent slug next month.

And I agree.

Wait for the data

I can cop the October rise but I think we need to see a bit more data before we start scaring the pants of home buyers and small business employers by talking about a 0.5 per cent rate rise on the first Tuesday in November.

CommSec thinks that rates will rise by at least 25 basis points on Cup day and by a further 25 basis points in December.

However if the next inflation reading, out on 28 October, is on the high side, then a 50 basis point rate hike next month cannot be ruled out.

So, it could happen and it might be justifiable.

Responsible Australians

Here’s a thought worth pondering. I’ve seen the argument that Australians will cope with rate rises because many have not spent the rate cuts but have boosted their home loan debt repayments.

It’s called repairing their balance sheets and is regarded as an act of responsibility. Whacking these people on the head with too many unnecessary rate rises could be bad policy and could retard the recovery. Remember, we want a recovery to make sure not too many Aussies lose their jobs!

So, it can be argued that all of this means the Reserve Bank is taking back stimulus that many people saved and didn’t spend, which suggests the Big Bank’s fears about too much demand driven by stimulus spending consumers might be exaggerated.

I’m not saying the RBA and its unquestioning supporters are wrong but I can’t wait to see the 28 October inflation figures. If they’re high, start worrying; but if they’re lower than expected, the RBA should think twice before going too hard on Cup day.

For advice you can trust, contact Switzer Financial Services.

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Published on: Wednesday, October 21, 2009