INTEREST RATES OUTLOOK

RBA LIFTS TO 5.75%

The Board of the Reserve Bank of Australia, at yesterdays meeting, has decided to raise the basic cash interest rate to 5.75 percent. This follows 13 months at the previous rate of 5.5 percent. The Board made no comment on the economy despite being subjected to an intense media campaign on what decision to make and why.

There will be many interpretations on this decision with the range of explanations citing a myriad of reasons. These are already as varied as the RBA wanting to put the cap on the economy before inflation gets out of control to raising rates in May rather than at the next opportunity when the move could be interpreted as solely a reaction to the next federal budget.

Media comment so far has centered on the way the average family will now have to pay around $40 a month more to service the home payments.

Political observers are now convinced the Federal Treasurer will be forced to make tax cuts in the budget.

OVERVIEW OF ECONOMY AND INTEREST RATES

THE OIL SHOCK AND OUR ECONOMY
Much of the financial commentators’ concentration these days is on how well our economy is positioned to weather the storm of an oil shock which could be coming as the vital commodity continues to escalate in price. Certainly the International Monetary Fund has awarded the economy a good report confirming that this year's growth is on track to achieve 2.9 percent and rising to 3.2 percent for 2007.

However, the Federal Treasurer has conceded that cost increases which are passed on as a result of the effects of rising petrol prices can easily and quickly push up the CPI.

As the price of oil keeps trending up and more people see such increases inevitably contributing to inflation and further balance of payment problems, various studies are now being done to plot how much of an increase will have what effect in end consumer terms and nationally. So far, this has included a lift of 30 cents per litre if there is an Iranian oil boycott and should oil reach $US80 a barrel then $12 billion annually will be taken from the Australian economy.

Stepping outside of such scenarios, the local economy is tracking only reasonably well. The latest CPI figure for the March quarter came in at 3 percent which is at the top end of what the RBA has stated to be acceptable.

The small increase to the CPI was recorded as being caused mainly by rises in health care and food costs with only mild pressure coming in from petrol increases. Apart from a stagnating manufacturing sector, the most recent statistics reflect reasonable overall confidence as they continue to show business investment maintains a strong position and consumer spending being good. This includes a healthy 5.2 percent jump in new house sales.

The only area of the economy which is clearly running well ahead of itself is Perth house prices which are reacting to the WA minerals boom and racing ahead at an unprecedented rate.

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