My Two Cents Worth

Andrew Pegler – 27 August 2010

Interest rates will stay steadyish until the end of the year when the economy picks up again and people start buying plasmas, doing those overdue renovations and generally consuming stuff.

As you may know the RBA uses interest rates to keep the lid on inflation; raising them increases borrowing costs, which dampens economic activity and that puts a lid on inflation. And vice versa with lowering them. The latest Reserve Bank board minutes reveal the boys and girls don’t think inflation will be much of a drama over the next six or so months and so giving the RBA time to consider its medium-term strategy.

There are three reasons why the RBA will pause for thought. Firstly, there’s the fear of what’s called contagion that may come out of the European debt crisis featuring P.I.G.S. (Portugal, Ireland, Greece and Spain) struggling to pay their debts. Contagion is the panic-driven spread of a financial crisis that rises out of a series of vicious cycles that form when confidence in a country’s ability to repay its debts goes south. Secondly, the sluggish US economy is struggling to stay awake at work and taking us all with it. (See recent blog US and us). And thirdly, there’s been a definite softening here in Oz over the last couple of months with banks reporting a reduction in the demand for mortgages and the aforementioned international issues hitting business confidence. Interesting to note that while consumer confidence is strong it’s not really translating into people buying stuff and firing up the economy in the process. This is because we have two things going on at once – firstly, households and businesses are deleveraging i.e. paying off the debts and secondly, the economy is softening.

My view for the next 12 months, and let me preface this by reminding you that economic forecasting was invented to make astrology look credible, is that inflation will move towards the top of the RBA 2-3% inflation target range towards the end of the year as people start to feel confident about flat interest rates and start spending and borrowing. Then in the absence of a global shock (a possibility) or the invasion by alien life forms with no respect for monetary policy (not so probable) the only way is up.

And in other news… according to the fourth Australian Work and Life Index study, Australians aren’t that happy with their job conditions, and we work too much. More than a fifth of us work over 50 hours a week and 60% don’t take regular holidays. Not surprisingly working mums cop it worst with 70% always feeling rushed and pressured. No wonder those paid parental leave schemes have gone down such a treat.