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We are being softened up

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by Peter Switzer

Isn’t it ironic that in a week where no really significant economic data was to be put up for show and tell, the Reserve Bank gets in and stirs up a hornet’s nest of speculation. And let me make my tip, which I do reluctantly, I reckon we’re looking at an interest rate rise in October!

Let me make this clear — I don’t think the Reserve Bank should raise rates but there’s a bloody-minded commitment by the RBA Governor, Glenn Stevens, to be on top of inflation and so the homeowners of Australia, along with small business owners, will have to pay the price.

RBA concerns

Glenn is a dour man, with a steely resolve to do his job properly, which doesn’t mean he’s right — he just thinks he is.

At the moment he’s worried about the success of the miners and the export sales, which will bring a lot more income to Australia. This is expected to drive up demand for capital equipment, construction, workers and the like, which could drive up inflation.

Scott Haslem, chief economist from UBS and an ex-RBA operative says the central bank boss is looking forward to this potential inflation, not back at what we will see in late October, when the Consumer Price Index is released.

Before this week, most economists said the RBA will wait and look at this number before moving. I hope they still will but I get the feeling Stevens is softening us up for another move.

He used a speech this week to get the banking economists’ tongues wagging. Then the RBA minutes of the September meeting did nothing to hose down the speculation that rates could rise next month.

Changing mind

But what threw me a little was yesterday’s Westpac/Melbourne Institute’s Leading Index which fell from admittedly high levels, falling for the fourth month in a row.

Even with all of this on board, the chief economist at Westpac, Bill Evans has changed his view that rates are on hold until next month to tipping an October rise.

Guys like Bill could have another economic view on the matter but a big part of his job is to guess what the RBA will do. It’s a service he does for the ‘punters’ who bank with Westpac — all banking economists are in on the act — and so his change of mind cannot be ignored.

It looks like what most economists were saying, that interest rates are at the decade-long average level and at a place where we could be on hold until inflation went outside the two to three per cent target band of the RBA, now could be wrong. And that’s because Glenn Stevens has the opinion we’re heading to solid economic growth driven by export mining income and he wants to beat inflation before it happens.

Too hard, too fast

However, he is not God. He is not infallible. The bank was raising interest rates in early 2008 before the collapse of Bear Stearns and Lehman Brothers, when the credit crunch was starting, the GFC was developing and the US recession had commenced in December 2007!

I recall this because I was complaining in The Australian, on radio, on TV and on my website that he was moving too hard and too fast on rates. People like John Hewson and former RBA boss Bernie Fraser were also saying the same in the media.

And it explains why our Big Bank was so aggressive and quick to move when he decided to cut rates in 2008 for the first time in nearly seven years. In fact, Mr Stevens underestimated what he needed to cut by even then, but he made up for it in October when he stunned the world by cutting by a full percentage point, double what the expert RBA watchers were predicting!

As I said, Mr Stevens is not God and so I hope he does not play it with many Australians' hopes and hip pockets next month.

For advice you can trust, contact Switzer Financial Services.

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Published on: Thursday, September 23, 2010