Interest rate rise back on the agenda

A strong and sustained rise in underlying inflation has reignited interest rate fears and forced economists to rethink their market expectations.

The Consumer Price Index grew 0.9 per cent – pushed by a banana led spike in fruit prices.

But despite the increase in underlying inflation, industry stakeholders have claimed any upwards rate movement by the Reserve Bank would be “crippling”.

The 0.9 per cent rise in the CPI for the June quarter 2011 should be kept in context with other economic indicators.

In the current CPI figures, there are some clear one-off impacts, such as the price of fruit which has risen almost 30 per cent due to the natural disasters that occurred earlier this year.

Australia is clearly experiencing the ongoing effects of the cautious consumer. Year-on-year housing approvals are down, retail sales are down and it’s now well reported that consumers are committed to rebuilding their savings.

My view is that  the unsettling debt crisis overseas has also undoubtedly played on consumer confidence.

RBA Governor Glenn Stevens indicated that consumers shouldn’t be anticipating any interest rate cut from the central bank.

Keeping rates on hold would be a sensible strategy for the RBA. Even though Westpac enconomist Bill Evans indicated if things continue the way they currently are rates could drop as much as 1%. I can’t see this happening though.

 



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