Business News

Only a dope would raise interest rates

| More

by Peter Switzer

Forget about the Reserve Bank raising interest rates next month – only a dope or a team of dopes would contemplate hitting the economy with another interest rate rise after the job figures we got late last week.

Remember, many economists were falling over each other to tip a rate rise in June after inflation figures and after looking at the RBA’s latest monetary policy utterings.

Of course, the smart ones who know what’s going on in the real economy were more hesitant to tip a rate rise. However, they know the history of the central bank board says these people can be too pre-emptive with their rate rises.

Government response

Well, the latest job numbers were too bad to ignore and if the RBA’s board backed a rate rise in June, the Prime Minister would be within her rights to give The Bank’s Governor, Glenn Stevens, a piece of her mind.

Sure, she must respect his independence but it shouldn’t mean Ms Gillard has to keep quiet when The Bank’s bloody-minded action is hurting the economy and her constituents.

On the other hand, Mr Stevens is free and independent, and so he can take her comments on board but does not have to yield to her. So, it’s a bit of pressure but he’s one of the best paid central bankers in the world on a million dollars or so a year!

Job numbers

Lets have a look at those job numbers to understand where the economy might be.

In April, we lost 22,100 jobs, which is the biggest decline in 22 months.

Economists expected we would get 18,000 new jobs, so that is nearly a 40,000 miss on their calculations. But it gets worse, with full-time jobs slumping 49,100 and only 26,900 part-time jobs created.

The unemployment rate was left at 4.9 per cent, which is still a good number but the RBA would have to look at the jobless rate over the next few months before they changed rates just in case this is the start of a new trend.

We have been talking about a two-speed economy for some time where the businesses not in mining or related areas, and which are hurt by high interest rates and a high dollar, are really struggling. I always thought we would have to see an uptick in unemployment and it could be starting.

Economy losing momentum

On that basis, the RBA should hold fire and currency traders think they will and it explains why the Aussie slipped into the 105-US cents region over the weekend.

This is how economist Savanth Sebastian of CommSec saw it: “There are clear signs that the Aussie economy is losing momentum. Jobs are now falling, adding to data showing stagnant retail spending, weak housing market and lacklustre activity in manufacturing, services and construction sectors,” he wrote.

“There is no doubt that the unusually late timing of Easter would have had an impact on the latest reading. But even if you have a look at a longer time frame, since the start of the year jobs growth has averaged a meagre 6600 people a month – a far cry from the average 30,200 jobs that were created each month in 2010. Clearly this highlights that the latest slide in employment is not an aberration.”

No rate hike

You don’t have to be an economist or a Reserve Bank board member to work out that this is no time to raise interest rates.

And, given stocks are currently wobbling as prices of commodities head lower and as some experts see a global economic slowdown emerging right when the European debt crisis again takes centre stage, only a dope would raise interest rates now.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Monday, May 16, 2011

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer and Paul Rickard the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

Why Aussie stocks lag Wall Street

Kill QE, kill rally? Nope!

Dow to reach 20,000 – can you believe it?

It’s not All Too Hard, it’s More Joyous!

Abbott deserves a Tony Award for that speech!