Friday, June 15, 2007

Howard faces rate rise reality

Australian Reserve Bank governor Glenn Stevens is flag the potential for a rate rise before the upcoming federal election He warned that decisions would not be influenced by the political timetable.

The warning flies in the face of government claims of a booming economy, but we have all heard that one before.

One commentator, Ross Gittins, says:

“This week's sheaf of figures may be great news for the politicians, but for the economic managers they're a worry. For most of last year, the great puzzle was why the national accounts said the economy was growing slowly when the labour force survey said employment was growing strongly.

“The national accounts say real gross domestic product grew by a rapid 3.8 per cent over the year to March, while the labour force survey says employment grew by a rapid 3.1 per cent over the year to May.

“Trouble is, with the economy having grown so strongly for so long - employment grew by 3.2 per cent over the previous year to May - you'd expect to be seeing signs of inflation pressure building, and there aren't any.

“…financial markets were right to respond to this week's figures by increasing their estimate of the probability that the Reserve Bank will raise the official interest rate again.” If it looks too good to be true, it probably is

I can’t say I fully understand the argument, but I respect the commentator and rarely find him off the mark. The bottom line is that Howard will no go to an election before his cobber George W visits Australia in early September.

The tipping is now building for a rate rise early in September which will more closely reflect the household economics of the country as opposed to the ‘booming’ markets. Good news at least for my well worn economic election prediction model.

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