17 October 2021
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The price is not quite right

Peter Switzer
10 August 2009
Never underestimate the negativity of headline makers from media outlets, but forgive them because they know not what they do! The latest that made me both cringe and laugh was — “Recovery comes at a price”. This was followed by bullet points — “Interest rates to rise” and “Growth to rebound quickly”.

Of course, many are good at what they do and that’s the art of arresting someone’s attention for long enough to buy the newspaper or read the article. But there sometimes is an accuracy issue with a catchy headline.

For example, in this case the “price” is not quite right. Let me explain.

Monetary policy

The story in question follows the Reserve Bank’s innocuously titled Statement of Monetary Policy.

This is the way CommSec reported it: “The Reserve Bank has highlighted the ‘considerable resilience’ in the domestic economy. The Statement of Monetary Policy has confirmed the next move in interest rates will be up. CommSec does not expect the first rate rise till March 2010.

“The Reserve Bank has raised its economic growth and inflation forecasts. The Australian economy is expected to expand modestly by around one per cent in 2009/10.”

And then to cater to potential borrower’s concerns about rising interest rates, Savanth Sebastian, from CommSec explained:

“If borrowers are worried about when rates are likely to be raised, the focus should centre on business investment. The Reserve Bank has stated that the one main area of concern remains the weakness in business investment, though early signs are that firms are looking at reconsidering cancelled investment plans.”


Meanwhile, the ‘money markets’ have the view that interest rates will rise by 1.5 per cent by this time next year, but many commentators think this is far too aggressive. By the way, the markets historically are very over-reactive and don’t have a great record as a forecaster of future rate rises.

I don’t think the Reserve Bank will want to choke off a recovery by spooking borrowers with a pre-emptive hit on inflation, which will prematurely scare off business owners/employers who they want to see make investment decisions and take on workers.

Watch economic growth

The important story from the Big Bank was that economic growth is expected to rebound but it’s not exactly very quick as the newspaper told us.

It said we should see 0.5 per cent growth this year instead of the -1 per cent it predicted not long ago. Then growth is tipped to head to 2.25 per cent in 2010 and while this is growth, it’s not quite good enough to stop unemployment rising. Australia, in the past, needed three per cent growth to stabilise the jobless rate and a tick over this pace to cut unemployment.

This suggests to me that the Reserve Bank will not be in a hurry to increase interest rates too quickly. It will be a bit of a juggle but I don’t think they will raise by 1.5 per cent by this time next year unless these growth numbers they just released prove to be wrong and too low. That remains to be seen.

And by the way, most borrowers have received a big cut in rates where many saw their home loans interest rate fall from the nine per cent area to the five per cent mark. Sure if it rises, it’s the price of a quicker than expected recovery but it’s a better one than losing your job, your business or your house.

Recession dodge

While some individuals have done it tough, as a country and an economy, we have dodged the recession bullet and have missed the hand-basket heading to hell, as some dramatists put it.

That’s why I think the headline maker’s “price” is not quite right. Rising interest rates are but they’re worth paying to not fully participate in the globe’s Great Recession and “growth” is not a price but a gift that we have been lucky to collect.

Rudd Government challenge

One final point, the challenge now reverts back to the Rudd Government to work out if we need their spending and escalation of debt plans. If the Reserve Bank is right on growth and the Government over-spends, it could push up inflation and interest rates quicker than anyone would like. And if rates go too high too quickly in an election year, then Malcolm Turnbull might start accumulating friends again.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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