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Rates - don't touch 'em

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by Peter Switzer

While the Americans tuck into their Thanksgiving turkeys, I hope the board members of the Reserve Bank take a lead from the significance of the timing and the investment figures we saw here yesterday to make sure they don’t act like turkeys next Tuesday by raising interest rates again.

Given what’s happening here in our miracle or lucky economy with its very best friend economic partner — China — there is no reason why the RBA should push our luck by giving us another interest rate rise as a pre-Christmas reminder that they’re watching us!

Remember the private sector

Sure, the overall economic data is good and both business and consumer confidence are heading in the right direction, but the private sector is not as healthy and bullish in real terms and that’s why we need a rate rise break in December.

On my final SWITZER show on Sky News Business Channel for the year I asked Shane Oliver, the chief economist at AMP Capital Investors, if he thought the RBA should raise rates in December. He gave it the thumbs down.

He thinks there would be no harm in letting up on the rate rising, and points out that we are much more sensitive about rate rises nowadays compared to 10 to 20 years ago.

It was once thought it could be over a year before a rate rise had an impact. And then it was argued that it takes around six months. However, Oliver says the media coverage, which he thinks is excessive, and the size of debt we carry has reduced the time between a rate rise and us feeling the pain in the hip pocket.

Data overview

This week, we saw construction figures rise by 2.2 per cent in the September quarter to a record high, but public sector construction rose by 17.6 per cent while there was a three per cent fall in activity by the private sector. Then we saw new business investment fall by 3.9 per cent in the September quarter, which was only the second fall in the past two years. However, investment slumped by a record 13.4 per cent in the manufacturing sector. That’s huge! On the good side, mining investment rose by three per cent, but things look really grim in the manufacturing area.

And remember, consumer confidence fell for the first time in six months in November in response to higher interest rates. That was the assessment of Craig James from CommSec.

Let me be clear, I am not turning negative on the Aussie economy but we have to be careful we don’t bake the golden chook or turkey. I reckon a key economic threat to us — the US economy — is lessening.

The Yanks wrapped up its pre-Thanksgiving trade with the S&P 500 hitting a new 13-month closing high, ending up 0.5 per cent to finish at 1,111. And it was economic good news that helped the market defy gravity.

Personal spending was up and better than expected, while consumer sentiment kept rising. Importantly, the weekly jobless claims dropped into the zone that augurs well for unemployment and new home sales rose by a big 6.2 per cent, which is the highest level for a year.

Remember, home prices have also been rising and anything that shows a stronger housing sector helps US banks and this underpins an improving US economy.

However, the durable goods reading did drop which sustains the fear and loathing drama.

Up since 6 March

Since 6 March, the local stock market has put on around 50 per cent. The US has come out of recession. China has defied the doomsday merchants to head towards double-digit economic growth. And the Australian economy has emerged as the strongest western economy in the world.

The federal stimulus that was bagged as excessive and only likely to boost saving has worked and the outlook is so good for next year that the Reserve Bank has started raising interest rates, though I hope they give us a break in December, especially after looking at those business investment figures.

Let’s hope good sense on interest rates can outweigh the heightened supply of testosterone to the Reserve Bank Board at the moment, and consequently they don’t touch rates on the first Tuesday in December.

For advice you can trust, contact Switzer Financial Services.

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Published on: Friday, November 27, 2009