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Governor Stevens set to star in A Nightmare of Debt Street – the sequel

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by Peter Switzer

The Reserve Bank Governor Glenn Stevens continues to terrorise those in debt with a speech yesterday that confirms he has no qualms playing Freddy Krueger in his remake of A Nightmare on Debt Street 2.

He said the central bank cannot be too timid when raising rates given that it was prepared to cut interest rates so rapidly.

He says his pointy-head colleagues at the Big Bank think, and I quote: “The period of greatest weakness in the Australian economy is probably past” and “the economy is likely to continue on a path of gradual expansion during 2010”.

(Sorry, the “pointy-head colleagues” reference was my interpretation of what he inferred, but it is comically accurate!)

Economists will tell you that interest rate or monetary policy works but with a lag of between six to 12 months, and that’s why, with our economy looking so good, he would want to put the interest rate cat amongst the debt pigeons now.

How much? And how soon?

My old mate Rory Robertson from Macquarie has read between the lines and says we could get three 0.25 per cent rises in a row to take the cash rate to four per cent by February.

CommSec’s Craig James says you can’t rule out a 0.5 per cent rise on Cup Day, which will put freaking Freddy into our Cup celebrations.

Stevens and his board are not dopes but there is a bit of guesswork in rate rises. While home loans rates are unbelievably low, business rates are high and I am not sure if small business will weather a quick rebound in interest rates all that well. If banks pass on the rate rises to business and customers zip up their wallets and purses, the recovery could lose steam.

Too much of a good thing?

Remember, I have been one of this country’s most public optimists for over a year, believing in the economy’s potential to avoid a technical recession and that good dividend-paying companies had been oversold at the height of the GFC rattling of stock markets. And I remain cautiously optimistic. Eventually, I will become outrageously positive but now is not the time.

That’s why I hope you are right Glenn, because if you are wrong and you go too hard on rates you might just slow up the recovery too much or even create the recession we have luckily dodged!

I don’t think this will happen but I would be much more confident about this if the rate rises weren’t, as Dr John Hewson described them, “so bolshie!”

For advice you can trust, contact Switzer Financial Services.

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Published on: Friday, October 16, 2009