The Australian Reserve Bank broke tradition today to make the announcement on the same day as their monthly meeting, rather than the usual day after.
Markets had expected a rate rise of 0.25% and the Reserve Bank did not surprise with a rise of that mark.
Citing inflation as the primary concern, this rise is a bitter disappointment for Australians and investors alike. It appears that they have forgotten that a fair portion of the inflationary pressure has come about from the fact they have lifted rates over the past year and increased the cost of housing.
It has become somewhat surprising that they continue to raise interest rates even though it does not seem to be having the desired effect upon slowing inflation that they seek.
Australia remains the strongest of the world economies and this is a major impact, however the GDP growth remains just over 4% and this number is considered high in Australia, however one can not help but consider the RBA is living in the past as the Australian economy is now larger and more robust, so a figure of 5-6% growth should not be feared.
Inflation remains a problem of oil prices and this has again been largely ignored as it could be sensible to assume a low interest environment would be more beneficial in times where costs have artificially escalated due to higher than normal oil and now interest rates.
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The US Federal has taken drastic steps lately to reduce rates in an attempt to stop the US Economy from moving into recession by reducing rates by 0.75% and 0.5% in two recent announcements, reducing their base rate to 3% compared to Australia’s new 7% mark.
This became necessary after a period of successive rate rises, that pushed confidence in the US markets over the edge and lead to the Sub Prime Market fallout.
The reductions in US Rates and rises in Australia, will now make the US Currency lending option more attractive, albeit with the significant additional exchange risks associated with it. Our finance member Specialist Mortgage will be able to assist you understand the options available on these.
Australia should not experience such a problem as we have a very different lending system, however we should not underestimate the calming influence of this latest rate rise.
Ironically the lift in rates comes soon after the ABS released their preliminary data showing house prices continuing to rise and also dwelling approvals for December falling, so housing prices should continue to grow fuelled by the genuine demand of an increasing population rather than be softened by the recent rate rise.
We will watch with great curiosity how new Prime Minister Kevin Rudd seeks to address this problem and bring the fiscal policy of the Reserve Bank back to a more reasonable and modern level.
