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Signs the big bank shouldn't miss

With poor old Aussie home loan borrowers looking at another first of the month interest rate Wednesday, the good news has to be that the Reserve Bank board would have to be on medication if it raises interest rates again next week.
Understanding our economic future and making the right decisions can be a real challenge but history can sometimes help.
When the Big Bank made November a bad news month for home borrowers by raising the cash rate of interest to 6.75 per cent, there were some over-excited economists tipping another in December. Smarter ones said the Bank would wait to see the latest inflation figures due out late January.
Since then the sub-prime loan problems coming out of the USA and infecting many other investment banks worldwide have become more worrying.
A couple of months ago 50 out of 50 economists surveyed by a high profile economics consultancy in the USA said no recession was on the cards. There are a lot more number-crunchers pulling out the ‘R-word’ right now with home sales in America hitting a record low this week. This led to interest rate cut speculation there.
The bad news is also in the UK with retailers who are close to the consumers are calling for an interest rate cut.
Experts think their house prices are 30 per cent over-valued and if proper valuations ever came about and the Pom homeowners felt 30 per cent poorer that would hurt their economy.
Put this together with the trouble in the USA and we have a progressively scarier global economic picture. These two depressing economic stories puts enormous pressure on China and India to keep on growing to offset the negatives from the USA and the UK.
All of this is happening against a background of our petrol prices averaging price $1.33 a litre and giving the local consumer another kick in the hip pocket.
This means the Reserve Bank has inflation concerns as their own interest rate rises, combined with lenders’ independent rate rises, are starting to cook the consumer a bit like the boiling frog principle.
This says a frog’s biological make up means they would not notice water warming up if heated and could actually be boiled alive. Similarly, local consumers have to be wary of rising interest rates, spurting petrol prices and other higher costs, such as rents, that could eventually cook ‘em alive.
Even Ben Bernanke, the US central bank boss, admits the history of economists shows they miss key economic turning points.

I’m an economic optimist but we are starting to see a pile of negatives I hope the Reserve Bank does not easily ignore. 

Published on: Friday, November 30, 2007

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