Business waits on RBA move

THE Reserve Bank of Australia meets on the first Tuesday of every month. In that meeting, a key decision is whether interest rates should be raised, lowered or left alone.

The next meeting will be watched with a deal of anxiety by businesses in Australia.

There are conflicting signals in the Australian economy but two recent results would appear to point to the need for an interest rate rise.

The CPI figures saw a year on year rate of 3.2 per cent achieved as at the end of June 2000.

This was not considered by analysts to necessarily be cause for concern but was above the band of acceptable levels as far as the RBA was concerned.

The RBA has consistently indicated that a rate of between 2 and 3 per cent would be as high as it would accept.

The next piece of evidence pointing to a potential interest rate rise was wages data.

The market prediction for wages growth for the three months to May was 0.8 per cent. The actual rate was 1.4 per cent, almost twice the expectation.

For the 12 months to June 2000, wages in Australia grew by 4.5 per cent. This suggests that wages growth is trying to keep pace with inflation.

Customarily, these two factors alone would have been sufficient to cause the RBA to lift interest rates.

A further impetus could be the continually increasing rate of economic growth forecast for the Australian economy.

A few months ago growth rates of around 3.5 per cent were forecast. Now forecasters suggest that a growth rate closer to 5 per cent is likely.

Despite these factors, the RBA has still held back for several reasons.

Anecdotally, the Australian small business sector is currently doing it tough. The cost of implementing the GST was a lot greater and far more time consuming than had been first anticipated.

This cost has meant that business has had it tough for some time. This has not yet been reflected in the growth figures for the economy as a whole.

A further complication is that no-one knows what the full impact of the GST will be.

We have never had a consumption tax of this kind in Australia. Forecasters are unsure as to whether it will simply result in a change in the pattern of consumption or whether there will be a reduction in the retail sales figure as a result of the GST.

It is certain that the RBA will need to raise rates soon after the September quarter CPI figures are released to try and stifle the possibility of rampant inflation.

How long the CPI will remain high is still a matter of debate. There are analysts who suggest that there will be a short sharp rise and a normal pattern will then resume.

Others suggest that this is a longer-term pattern that will be around for some time.

If this wasn’t enough of a juggling act for the RBA, it is also mindful of the parlous state of the Australian dollar – particularly against the US dollar.

The exchange rate is languishing around the 58 cents or 59¢ mark and does not show any real prospect of increasing. Any move by Alan Greenspan to raise rates in the US could lead to a fairly massive flow of capital from Australia to America.

This could put our dollar under severe pressure.

Weighing all these factors, what should the RBA do?

This columnist supports the calls by the various chambers of commerce that the RBA ‘sits tight’. The time to look at a rate rise would be after analysis of the September quarter CPI figures and once the full impact of the GST has been assessed.

It will then be possible for the RBA to determine the extent of the rise required and the likely duration of increased CPI figures.