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Who will have the last laugh? The Three Stooges and the rate rise

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by Peter Switzer

The Reserve Bank’s decision to slap a surprise interest rate rise, which incidentally I tipped on the six o’clock Sky News on Monday night with the great newsreader Jim Waley, has got me thinking about those comic geniuses — The Three Stooges. More on that in a minute.

A gambling man

Like a tragic comedy, the interest rate picnic is ending with the party-pooping Reserve Bank taking a punt before the Melbourne Cup to start pushing rates up from the current emergency cash rate level of three per cent. Since the GFC threatened to throw us into recession, the cash rate had been slashed by 4.25 per cent.

That was then. This is now!

And while we could say “easy come, easy go”, this early move by the Big Bank, which has been called a pre-emptive attack on future inflation, is a gamble by the RBA Governor Glenn Stevens. But many black clouds have a silver lining and this one is for Malcolm Turnbull as the rate rise has, at long last, given the struggling Federal Opposition a reason to stop acting like a bunch of squabbling losers.

Political gain

Opposition Treasury spokesman Joe Hockey has been quick to blame the Rudd Government’s stimulus package for this rate rise now, and it is hard to argue with him. The stimulus package, the rate cuts and China’s strength has protected us from a technical recession.

If the stimulus was not as big and not as successful, the economy would be in more trouble and unemployment would be higher and rising. That would mean the Reserve Bank board would be six months away from raising rates and, in fact, home loan interest rates would be under five per cent.

Up, up and away

This comes as we learn that 78,131 new cars were sold in September and that’s a 2.5 per cent rise in seasonally adjusted terms.

This means now that retail sales, car sales, house sales, house prices consumer confidence, business confidence and share prices are all up. And that’s why the Reserve Bank has raised interest rates.

That said, I think it is unnecessarily early with the Aussie dollar rising and unemployment still not hitting its peak. Setting interest rates is not an easy job, but that doesn’t mean we have to assume the Reserve Bank always gets it right.

They got it wrong last year when they were raising interest rates as credit markets were freezing up following the fall out from the sub-prime loan crisis in the USA.

The decision gives the Opposition a chance to bag the Government — rightly or wrongly — and brace yourself for a few rises as the ‘experts’ on the RBA say they will be trying to get to a four per cent cash rate before taking a break to see how the economy is travelling.

On the mend

By the way, the good news is that the Big Bank thinks our economy is mending fast, making jobs safer, businesses more likely to boost profits and keener to take on new workers. The Bank thinks growth next year gets up into the 2.5 to three per cent region, which is good news.

No laughing matter

Oh yes, there is one other potential problem out there.

Unfortunately, this 0.25 per cent rate rise might give banks a chance to raise interest rates by more than that amount. I hope they don’t, but there are many banking insiders who have tipped that this scenario was on the cards!

This will mean Joe Hockey will slap Wayne Swan who in turn will slap the banks which is reminiscent of an old Three Stooges routine. However, in this case the fourth stooge — and that’s anyone in debt — gets the final slap.

For advice you can trust contact Switzer Financial Services.

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Published on: Wednesday, October 07, 2009