Business News

Rate rise unwise?

| More

by Peter Switzer

Another first Tuesday of the month has come and gone for the borrowers of Australia and the anxiety of awaiting the decision by the Reserve Bank board on the fate of their monthly repayments has brought another slug to the country’s hip-pockets.

The financial markets said it was going to be 50:50 but a survey of economists suggest around two-thirds thought a rise was coming.

But was it necessary now? That’s the important question.

Case for and against

On unemployment figures, you would have to say 'yes' with the latest fall taking the jobless rate to 5.3 per cent. But on just about everything else it would be 'maybe' or 'no way'.

Business investment is tipped to be big this year but the recent figures were not over-the-top flash.

Business conditions were down in January while business confidence was down in December and up in January.

Inflation is not threatening, profits used for calculating GDP came in less than expected and so did inventories.

Meanwhile, December’s GDP is tipped to be around 0.7 per cent but this has been powered by stimulus that now has been whisked away.

Retail results

The Australian Retailers Association (ARA) said the ABS Retail Trade figures released yesterday showed a 1.2 per cent rise in January sales, which was a further disappointment after a 0.9 per cent fall in December sales. They argue that the numbers indicated a dismal post-Christmas sales season.

ARA executive director Russell Zimmerman said retailers who offered post-Christmas sales were expecting more significant growth and January sales gave a clear warning the Reserve Bank should not have raised interest rates with retail sales falling short of expectations.

"Last month the Reserve Bank showed wise and patient strategy when they left interest rates on hold and these January retail sales figures are another sign that there is a long way to go before homeowners can manage any interest rate increases without stalling economic recovery,” he said.

"When compared to January 2008, this year there was a three per cent growth in retail sales. This is not something for retailers to celebrate considering year-on-year growth from January 2007 to January 2008 was about 6.3 per cent.

"The impact of the stimulus package artificially inflated the 08/09 Christmas and post-Christmas sales results. In the 09/10 holiday period, retailers are seeing a more accurate reflection of consumer trepidation after successive interest rate rises and without help from government hand outs.

"The post-Christmas period begins on Boxing Day and goes through until mid January and at this stage it appears retailers have fallen well short of projections of $6.77 billion (4.1 per cent growth). Early indications are pointing towards a growth more like 2.2 per cent or $6.66 billion," Zimmerman said.

Stimulus withdrawal

Zimmerman makes the point I have been arguing that this Aussie economy is not all that strong and that’s because the stimulus which helped the economy last year has now gone. And while I think our outlook is good, it could be slightly ruined by too many interest rate rises too fast.

Overload

Finally, why overload Australian consumers and small business with an interest rate rise, which could only be targeted to kill an inflation threat that is at least a year or so off?

For advice you can trust, contact Switzer Financial Services.

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.

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.

Published on: Wednesday, March 03, 2010