Reserve Bank of Australia Faces Difficult Interest Rate Decision

The big story this week is whether the Reserve Bank of Australia has the courage to raise interest rates. The first quarter CPI numbers showed that prices were growing 2.1% faster than the same time last year. And at a rate of 1.2% for the quarter, the rate was higher than analysts expected. So will the Bank get the rate rise out of the way now, before the Federal campaign heats up and the government starts doling out millions in goodies?

It’s a horrible time to be an Australian central banker. On the one hand, you have to deal with obvious inflation in the local economy. Unemployment is low. Business spending, consumer spending, and government spending are all strong. And credit growth is in the double digits. Sounds like just the right time to tap the proverbial brakes and slow things down a bit.

What’s more, the Aussie dollar may get weaker in the next few weeks as traders unwind global carry trades. That is, if investors get really spooked about risk, they’ll take their speculative bets off the table. This means the Aussie dollar may experience some weakness. While that is surely good news for exporters, it makes imports cheaper, which can fuel more spending and price increases.

Geez, it’s a lot to think about, isn’t it? And then there’s housing. Graham Joyce of the Real Estate Institute of Australia says the Federal government should double its first home buyers’ grant from AU$7,000 to AU$14,000 so young people can enter the market. But then, he would say that, wouldn’t he? Real estate professionals must love grants. They simply jack up prices and fuel demand without addressing any of the structural problems that affect affordability (like supply). You’d think the mess in America would clue people in to the fact that creating a greater supply of credit or money (through grants) only fuels a bubble. Oh well. The RBA has its hands full. Good luck Glenn Stevens!

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