You could be forgiven for thinking the governor of the Reserve Bank is hell bent on raising interest rates. It seems no matter how much the economy gets battered around, the governor sees a brighter economic picture around the corner. Or does he?
Speaking to the Economic Society of Australia today in Brisbane, Glenn Stevens made it clear that in the board's view, inflation was likely to move higher rather than lower in the medium term. Now that's not to say the economy will improve to coincide with rising inflation, it's simply making the point that inflation looks to be on the rise. And that's essentially the biggest issue for the RBA.
He also made reference to the fact that the mining boom was producing significant benefits in the resources sector as well as inspiring a once-in-a-generation mining-related private sector investment boom. A higher Aussie dollar is also producing many financial benefits for ordinary Australians. So despite the possibility of higher rates, we shouldn't be whingeing so much!
Meanwhile the Westpac-Melbourne Institute Consumer Sentiment Survey has fallen 2.6 per cent (the lowest level since 2009) because - no surprises - consumers are still cautious. We're snot spending because we don't know what's around the corner. There are many failed retailers that can attest to this.
But at the end of the day the Reserve Bank is focused on inflation. It may be that we even get a rate increase as early as August. That won't necessarily be because the economy is going 'gang-busters', rather price pressures (some related to the mining boom, some not) are posing enough of a threat within the overall basket that the Reserve Bank measures, that they won't hesitate to tighten policy.
Interestingly the Aussie dollar rose today no doubt on the back of expectations that rates could rise earlier than expected.
David Taylor
