Much of the increase in the Aussie dollar is due to the anticipation of an interest rate rise at the next Reserve Bank of Australia board meeting in May. The only thing that seems likely to push the dollar back down is if the market suddenly considers that the RBA will not increase rates in the next few months. At the moment that seems unlikely.
In fact, with the way that the economy is performing and the increasingly heavy pressure put on inflation, more than one rate rise can be expected this year. If that happens and given the supposedly tight labour market, we could also see the potential for a wages breakout as well.
The decreased power of trade unions and their collective bargaining activity means that the potential for pay increases at levels significantly above the inflation rate are kept to a minimum. However, if the labour market is as illiquid as has been claimed then the pressure on employers to offer higher wages to retain staff, and higher wages to entice staff could have an equal impact on the economy.
We won’t say that we have reached “crisis” proportions yet – there seem to be enough crises doing the rounds, eg. “Ice” crisis, health crisis, etc, without our adding to mix. Even though most of what the media calls a crisis is far from it.
All we will say is that the commodity boom can only help the economy so far. Paul Keating made his famous “Banana Republic” statement twenty years ago, but it wasn’t in relation to commodities. There is nothing to say that the commodity boom cannot continue while the Australian consumer and borrower become seriously disadvantaged by spiralling inflation and interest rates. You only have to look at many of the resource rich African economies that are basket cases despite having billions of dollars worth of raw minerals.
Now THAT is what we call a POTENTIAL crisis.
The Daily Reckoning Australia