What drove that rate rise

The Reserve Bank is clearly worried about the risks that would come with a new minerals boom in Australia.

That is what spurred its board yesterday to continue the bank’s aggressive program of  rate rises, that have seen increase its target interest rates in five of the past six months.

The clue is given in a single sentence of the statement the bank’s Governor, Glenn Stevens,  issued after yesterday’s board meeting.

It came after Mr Stevens had noted that growth in Asia is still quite strong, despite the global economic crisis.

As a result, he said:-”Australia’s terms of trade are rising, adding to incomes and fostering a build-up in investment in the resources sector.”

Regular readers will know that Australia is not alone in this situation.

Our northern neighbour, Papua New Guinea, believes that it is also on the brink of a new minerals boom, based on petroleum gas developments, in its highlands.

And PNG officials are telling all who will listen that their country will need another 10,000 more foreign workers  to help it cope with the demands this will bring.

The Reserve Bank’s central aim, in adjusting rates,  is to keep Australia’s underlying inflation rate within a 2-3 per cent range over the course of a business cycle.

With inflation just above 2 per cent, at present, retail sales weak, manufacturing “lacklustre” – and  easing – and home building approvals down, the risk of damaging price rises in the immediate future would seem to be low,

The Reserve Bank, though, says it is looking past that.

It says strong growth in Asia is “contributing to pressure on prices for raw materials.”

So, while inflation is expected to remain low this year, prices are likely to rise strongly after that, as “temporary factors” that are still holding inflation down dissipate.

The impact on family budgets, though, will be huge.

The Housing Industry Association, for example, says first home buyers, with a typical $300,000 mortgage, will soon be facing monthly repayments of $2,026.

That’s $266 a month more than they were paying, as recently as September.

However, the Treasurer Wayne Swan, said most Australian families are still paying less, on their home loans now, than they were before the global economic crisis.

But yesterday’s rate rise probably won’t be the last, in the current upswing.

The Reserve Bank, itself, says Australia’s interest rates will still  be below “normal” after yesterday’s 25 basis point rise, which took its target rate to 4.25 per cent.

So there is more pain to come.

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Rates:a strange decision

The Reserve Bank’s decision to raise rates – yet again – right now – is strange.

Retail sales fell in February.  So did home building approvals.

Manufacturing activity, too, has eased.

Indeed, the Australian Industry Group described its menbers’ performances, last month, as “lacklustre.”

With the Federal government’s stimulus measures fading rapidly, further easing is to be expected.

Inflation is not an immediate worry, either.

Indeed the Australian Bureau of Statistics puts Australia’s current inflation rate at 2.1 per cent,

That’s at the lower level of the Reserve Bank’s target range.

It says it wants to keep the nation’s inflation within a 2-3 per cent range, over the course of a business cycle.

There has, of course, been plenty of warning that interest rates are, once again, on the way up.

The bank, itself, has said they need to return to a “more normal” level, now that the global economic crisis is passing.

But the bank’s aggressive  timing is still puzzling.

It would be easy to assume, from the latest rise, that the bank simply feels more comfortable raising rates, than  keeping them on hold.

The reasons its Governor, Glenn Stevens, gives for the latest rise have much more to do with international developments, than what is happening on Australia’s home front.

Mr Stevens said , for example, that  the global economy is growing, and world GDP is expected to rise at close to trend pace in 2010 and 2011.
He admitted, though, that the expansion is still hesitant in the major countries, due to the continuing legacy of the financial crisis, resulting in ongoing excess capacity,” Mr Stevens said.
But he noted that Asia has bright prospects.

” In Asia, where financial sectors are not impaired, growth has continued to be quite strong, contributing to pressure on prices for raw materials,” Mr Stevens said.
He said, too, that earlier worries, about debt levels in countries  like Greece and Iceland ” have now eased.“

Mr Stevens noted, also, that mortgage finance in Australia had been expanding at what he called  “a solid pace.’

But he admitted that new loan approvals for housing had moderated over recent months as interest rates rose and the impact of large grants to first-home buyers  tailed off.

Expect to see more of that “moderation.”

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Rates:up again

The Reserve Bank board has raised its target interest rate by 25 basis points, to 4.25 per cent.
The Board’s Governor, Glenn Stevens, made the announcement this afternoon.
He said The global economy is growing, and world GDP is expected to rise at close to trend pace in 2010 and 2011.
“The expansion is still hesitant in the major countries, due to the continuing legacy of the financial crisis, resulting in ongoing excess capacity,” Mr Stevens said.
” In Asia, where financial sectors are not impaired, growth has continued to be quite strong, contributing to pressure on prices for raw materials.
“The authorities in several countries outside the major industrial economies have now started to reduce the degree of stimulus to their economies.
“Global financial markets are functioning much better than they were a year ago and the extraordinary support from governments and central banks is gradually being wound back
“Credit conditions remain difficult in some major countries as banks continue to face loan losses associated with the period of economic weakness.
“The concerns regarding some sovereigns appear to have been contained at this stage.
“Australia’s terms of trade are rising, adding to incomes and fostering a build-up in investment in the resources sector.
“Under these conditions, output growth over the year ahead is likely to exceed that seen last year, even though the effects of earlier expansionary policy measures will be diminishing.
“The rate of unemployment appears to have peaked at a much lower level than earlier expected. The process of business sector de-leveraging is moderating, with the pace of the decline in business credit lessening and indications that lenders are starting to become more willing to lend to some borrowers.
“Credit for housing has been expanding at a solid pace. New loan approvals for housing have moderated over recent months as interest rates have risen and the impact of large grants to first-home buyers has tailed off.
“Nonetheless, at this point the market for established dwellings is still characterised by considerable buoyancy, with prices continuing to increase in the early part of 2010.
“Inflation has, as expected, declined in underlying terms from its peak in 2008, helped by a noticeable slowing in private-sector labour costs during 2009, the rise in the exchange rate and the earlier period of slower growth in demand.
“CPI inflation has risen somewhat recently as temporary factors that had been holding it to quite low rates are now abating. Inflation is expected to be consistent with the target in 2010.
“With the risk of serious economic contraction in Australia having passed some time ago, the Board has been lessening the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker.
“Lenders have generally raised rates a little more than the cash rate.
“Interest rates to most borrowers nonetheless have been somewhat lower than average. The Board judges that with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average.
“Today’s decision is a further step in that process,” Mr Stevens said.

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A double win for shareholders

Six million Australian share owners can look forward to more competition – and cheaper trades – before the end of the year.

At least one other operator, apart from the Australian stock exchange, should be offering share trading facilities by then.

This will happen under historic changes that the Federal government has just announced.

The Financial Services, Superannuation and Corporate Law Minister Chris Bowen said the government had given a new competitor, Chi-X in principle approval to operate in Australia.

“This is based on advice from ASIC that Chi-X is well advanced, has already met the principal requirements for the issuing of a licence and is well advanced to meet the other, more minor requirements for the issuing of a licence,” Mr Bowen said.

He said this would advance Australia’s long held ambition to become a regional financial hub.

“This announcement is important for Australia’s ambition to be a financial services centre,” Mr Bowen added.

He said this development would not have been possible without the government’s decision last August to transfer supervision of Australia’s financial markets from the Australian Stock Exchange to the Australian Securities and Investments Commission.

“I said ……that decision, would enable competition to be considered on its merits and that is what has occurred, Mr Bowen added.

“I also said at the time that any alternative market operator could not begin operation until after the transfer of supervision had occurred.

“And that remains the Government’s position.

“The transfer of supervision is well advanced and remains on track to occur in the third quarter of this year,” Mr Bowen said.

He said the government had also received two other applications, to operate in the market.

“… one is from Liquidnet.

” and one is from AXE,” Mr Bowen said.

“My understanding is that neither of those applicants are pressing their application at the moment,” he added.

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