Rate Pressures Rise

By Glenn Dyer | More Articles by Glenn Dyer

The market is expecting the Reserve Bank board to lift interest rates at its August meeting because there is now a belief that prices will continue rising into 2008.

Thanks to the impact of drought, higher petrol and dairy prices and the rising cost of housing in the boom states, and the sharpest rise in rents since 1989, price pressures aren't going away.

And with Federal and state governments lining up to boost prices for beer, tobacco, power, gas and water, public transport and a host of fees and charges between now and early 2008, there are additional price pressures building.

There are few dissenters, but some economists now tip a second rise, perhaps in November, or in February of next year because of the building up (they claim to see) in inflationary pressures from the CPI numbers.

But the sudden emergence of instability in financial markets could see the pressures for a rate rise ease if it continues into next week.

The market shakeout is worrying and the 1.5 USc drop in the value of the Australian dollar overnight, from around 88.30c to 86.86 Friday morning, is a sign of the instability.

The worse than expected inflation figures for the June quarter is the driver with analysts delving deeper into the numbers and discovering that price pressures are more deeply embedded in some parts of the economy than previously thought.

But when asked on radio yesterday about whether a rate rise would happen before the next Federal election, Federal Treasurer, Peter Costello had this to say:

"I put in place the policy that covers interest rates in this country, which is that we will shoot to keep inflation between 2 and 3 per cent and that interest rates will be targeted at keeping inflation between 2 and 3 per cent. Inflation is currently between 2 and 3 per cent – that is good, we are happy with that.

"Now the Reserve Bank is charged with making an assessment in relation to inflation. The only thing I will say is that it is currently right where we want it."

You get the impression he really wouldn't like one.

As well, the impact of the higher Australian dollar is cutting earnings of exporters (and sales growth), especially among resource companies, but its impact as a depressant on import prices was not as pronounced as economists thought it would be in the quarter.

The 1.2% rise in the CPI for the quarter produced an annual rate for the year to June 30 of 2.1%, the lowest for three years but well above all market expectations. (It's low because the high 1.6% June quarter, 2006 rate has rolled off the base for comparison in the latest quarter.)

And the fact that the NZ Reserve Bank lifted rates for a fourth time this year will make it a tiny bit easier to lift rates here.

The Bank of England and The Bank of Canada have both increased their key rates this month and South Korea could follow in the next month.

The driver in the June quarter was the rising cost of housing (especially in the boom areas of Brisbane, Perth and Darwin) and the rising cost of rent (especially in NSW).

That makes the Labor Party-inspired talkfest in Canberra about housing affordability yesterday interesting, but a waste of time because the real reasons won't be tackled: that combination of personal aspiration, greed and the grasping nature of state and local government, especially in NSW and Victoria.

Through the year to June quarter 2007, the All groups CPI rose in all capital cities with the increases ranging from 1.7% in Sydney and Adelaide to 3.7% in Darwin.

The higher result for Darwin was largely due to a 7.3% rise in housing, more than double the 3.6% increase for the weighted average of eight capital cities.

Perth also recorded a strong rise for housing (+5.7%). Melbourne and Adelaide showed the lowest rise in housing at 2.7% for the year.

"The rise in housing this quarter was mainly due to increases in both rents (+1.6%) and house purchases (+1.0%). This is the largest quarterly rise in rents since September quarter 1989, when the rise was 2.1%.

"Average rents rose in every capital city, with the highest increases in Perth (+2.9%), Darwin (+2.4%), Brisbane (+2.2%) and Canberra (+2.0%). Sydney and Melbourne both showed the lowest increase of 1.3%," The ABS reported on Wednesday.

"Increases in house purchase prices were recorded in all capital cities, with increases ranging from 0.3% in Canberra to 2.5% in Hobart. Over the twelve months to June quarter 2007, the housing group rose 3.6%.

"This rise was mainly attributable to rents (+5.2%), house purchase (+2.7%), and property rates and charges (+5.6%). Annually, housing increases were led by rises in Darwin (+7.3%), Perth (+5.7%) and Brisbane (+5.1%)", the ABS said.

Some solid analysis from Goldman Sachs JBWere economists has exposed the impact of housing on the CPI: it must more important than it seems.

This is what they told clients yesterday:

"The 2Q CPI is a 'fairer' gauge of underlying inflationary pressure after the statistical anomalies in the 1Q data were corrected.

"The emergence of a chronic undersupply of established housing is becoming increasingly apparent in consumer prices as home purchase costs and rents (the 2 largest items in the CPI basket) take over the baton as the driving force of inflation.

"Globally traded prices are showing signs of increase with the sharp rise in the A$ in the June quarter failing to prevent traded goods and services prices from rising.

"Only for a moderation in government administered prices underlying inflation would have been higher still, however, it appears to us as a false trend given well flagged rises in utility charges in 2008.

"The Australian economy is an economy expanding at a pace well above its productive ability with few signs of spare res

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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