The 25 basis points rise in official interest rates to 6.00% announced yesterday by the RBA shows the RBA is concerned about inflation and believes that past increases in interest rates have not yet bitten. Indeed credit growth is rocketing away at about the highest levels for more than a decade. New loans for housing grew at 25% in the year to May. Even ignoring fruit and fuel price increases inflation is drifting out of the RBA's comfort zone of 2.5-3%. The market is also attaching a high probability to a further interest rate hike later this year.
The higher interest rates - and higher fuel prices - will cut into spending and will mean that many Australians will be unable to afford to live as well as they would have expected given the July 1 tax cuts. The RBA however still see the $9 billion tax cuts as having a net stimulatory effect. Indeed it is this effect that might be seen as the villain driving the interest rate hikes.
The RBA are concernmed about strong growth in the world economy - particularly in China and Japan - though there has been lower than expected US growth.
There is also RBA concern with trade unions building price increases into wage demands thereby generating a wage price spiral. Jobs will harder to get as a consequence of the hike. To compensate those on fixed incomes will be better-off and house renters at least won't be worse-off - at least in the short-run.
One suspects that the interest rate hike will hit hardest in the low growth states such as NSW and Victoria - WA and Queensland have resource booms driving rapid growth.
I looked at a number of newspapers this morning and most gave the RBA a tick of approval. There were a few rumblings about possible long-lags in monetary policy effects that might tip slow-growing states into recession though this would be a consequence of recent interest rate tightening generally rather than this single small increase - interest rates have risen 7 times in 4 years.