RBA hikes, US stumbles

Posted October 12,2009

Glen Stevens either has good communications advisors or he is much more than just a numbers man. By latching the noun ’emergency’ to the lowest cash rate in 49 years he has set himself up brilliantly for the inexorable round of rate rises that have just kicked off.

With improvement to national job ads, housing finance figures and retail sales it was not as if we didn’t see a rate rise coming. Add to that a world economy emerging from its inertia and surely unwinding the emergency settings is the best move. Isn’t it? Not according to a chorus of economists and industry leaders like the Australian Industry Group’s Heather Ridout who argue that we are not out of those pesky woods yet and a rate rise risks skewering the recovery. NAB’s Alan Oster, writing for the day after the announcement, was typical of many when he said the real risk is that “the RBA is responding to growth in the economy that isn’t really there. There’s been no growth in the current quarter and the economy is certainly not back on track. We’ve basically just dodged a bullet.” Glenn Stevens’ optimism has however been vindicated almost immediately with the latest jobless data actually showing a fall in unemployment from 5.8% to 5.7%.

The Australian economy still faces serious problems. Higher interest will drive up the $AUD as international currency investors seek higher deposit yields. Add to this our close ties to the booming Chinese economy and the humble $AUD may soon hit parity with the $USD. This is bad news for exporters and feeds our trade deficit. On the up side, the inflation genie stays in its bottle for now and that iPhone you saw on ebay out of Texas just got that little bit cheaper.

And then there are the home owners. Raising interest rates for the first time in 19 months exposes the more tightly geared or “the underdressed” as Warren Buffet calls them. Many of these poor folks will be first home buyers suckered in by the heady cocktail of free money and emergency low interest rates. Unfortunately for them monetary policy is the best counter setting up for a potential catastrophe in home values. But the party is not over yet. We still have some time to go before interests rates are back to normal levels – or trend as they call it. As Commonwealth Bank economist James McIntyre put it “the RBA isn’t looking to take away the punch bowl, just reduce the alcohol content.”

And in other (sobering) news… despite all the green shoots chatter in the US, recent data has revealed some of those green shoots may just be advanced mould. After several months of tentative improvement the latest national job figures have heightened concern that the US recovery will be long and lean. 263,000 jobs were lost in September which edged unemployment up to 9.8% from 9.7% in August. Meanwhile Peter Schiff, the bearish American economist and president of Euro Pacific Capital, who is known for spot-on predictions, told Yahoo Finance’s Tech Ticker that the stimulus is a disaster and that the US economy is now worse than it was in the crucible of March. “We are much more indebted now our phony, consumer based economy is not viable, it only exists for as long as the Chinese and Japanese lend us money.” Schiff’s view is backed by the September slump in US car sales after the Cash For Clunkers scheme wound down indicating the spike in auto sales was more a stimulatory mirage than a sustainable shift.