Rates:Shock and awe?

The Reserve Bank’s strategy of raising interest slowly and steadily has had only a limited impact, so far.

That raises a question. Will it try something a little stronger, this time? A little shock and awe, perhaps?

That is a rate rise of 0.5 per centage points, instead of yet one more rise of 0.25 point jump. The bank’s board, which meets tomorrow to review rates, will be tempted.

It’s not as though the string of rate rises, already announced, has had no effect. Surveys show that both consumer and business confidence has been dented. And spending is not rising as strongly as it was.

The trouble is, though, that despite all that, inflationary pressures are still remarkably resilient. The Reserve Bank wants to change the public’s mindset. And yet one more small rate rise might not be enough to do that.

The bank has another worry before it, too. That, of course, is the government’s determination to proceed with the $31 billion worth of staged tax cuts that it has promised to pay over the next three years.

The first round of those cuts is due very soon. They will be paid from July 1 this year. The Treasurer, Wayne Swan, says the tax cuts will help to curb inflation, by encouraging restraint in wage demands.

The Reserve Bank doesn’t agree. It believes that people on low to moderate incomes, in particular, will just spend that extra money, when they see it in their pay packets.

That, too, will tempt it to take preemptive action, with a bigger than expected rate rise this week.

All this means that there is now a real chance that we will see a rate rise of 0.5 per centage points tomorrow, rather than the usual small rise.

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Recession? The Treasurer’s pledge

The Treasurer, Wayne Swan, says he will do “everything in his power” to avoid a recession.

That pledge, made in a television interview yesterday, seems odd. The Australian economy is booming. And “help wanted” signs are out everywhere.

But inflationary pressures are also at a 16 year high. And a weekend newspaper report said the Reserve Bank wants to cut Australia’s growth rate from the 4 per cent level seen over recent years to something like 2.75 per cent.

And the bank has just one weapon at hand. That, of course, is interest rates.

There is no doubt that the bank is prepared to use it, even though it knows that the consequences fall unfairly.

Home buyers are hit hardest. But that’s only one third of the community. The rest either rent, or already own their homes outright.

Business suffers, too. Indeed, this is a dangerous time, as many have already discovered, to be running a business based on high levels of debt.

But the boom is strongly based, too. Not only are commodity prices at record levels. The government’s advice is that they are likely to rise even higher.

That, of course, will make the government’s job of curbing inflation even tougher. Australia already has a two speed economy, with the commodity States, Western Australia and Queensland, roaring. Things are not so strong, though, in New South Wales, Victoria or Tasmania.

This, too, complicates economic management. The powers that Canberra has, to complement the Reserve Bank’s attack on inflation, are all national in character. There is little a Federal government can do to promote growth, say, in South Australia, while curbing it in Western Australia and Queensland.

There are some tough times ahead.

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