Further rate rise looms on Australia’s horizon

US FEDERAL Reserve chief Alan Greenspan has consistently stated his ‘pre-emptive’ strikes against inflation reflected a concern about the tightness in the US labour market.

The current environment is one of strengthening global demand coupled with higher prices for materials and other non-labour inputs in the production pipeline, all of which could lead to a re-emergence of inflation.

These were the comments of Mercantile Mutual Investment Manage-ment chief investment officer Geoff Martin to a group of advisers when he visited Perth recently.

Mr Martin said the Federal Open Market Committee saw the current economic growth as unsustainable.

He said that, in December, the FOMC were reluctant to undertake any remedial action with the fear that Y2K uncertainties could soak up the liquidity that had been available at the time.

When Y2K issues turned out to be a damp squib and earlier concerns were allayed, the Federal Reserve went into action mode. The expectations of most economists were realised when the Federal Reserve increased rates in the US by 0.25 per cent earlier this year, Mr Martin said.

He commented that, in Australia, a similar environment prevailed, with rising export volumes, high consumer sentiment and frenzied activity in the housing sector as a prelude to the GST.

With the addition of the tax reform package and the Olympic games, Mr Martin indicated that a GDP growth rate in the year 2000 could be at least 4 per cent and possibly 4.5 per cent.

Concurrently, there is little pressure on the inflation rate from wages and prices at present, Mr Martin said. The inflation rate is expected to stay within the RBA’s desired band of 2 per cent to three per cent.

Mr Martin said that more moderate growth would probably follow after the euphoria generated by the Olympics had eased, reducing pressure on the interest rate from the economy.

This could generate a wage push that may jeopardise the inflation position should the union movement attempt to redress any perceived negative effect on the standard of living as a result of the GST.

Mr Martin commented that a fall in the Australian dollar could also result which might lead to the RBA raising rates simply to shore up the dollar.

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