A rates breather

I wouldn’t be a member of the RBA board for anything right now.

Each month (except January, when you get a month off) the board members are faced with the question of whether to raise interest rates and get ahead of inflation, or leave rates where they are and let the economic recovery take a more solid hold.

For the last few months – and for the foreseeable future – it’s going to be a very hard decision to make.

And no decision is ever going to be popular.

For example, retailers and many small business people remain furious the RBA decided to lift rates in November, just ahead of Christmas and just as it seemed the economy was starting to get back on track.

And with good reason too.

Yesterday’s GDP data – which measures economic growth up to the end of September – shows economic growth has actually been a lot weaker than many have thought for much of this year.

Adding weight to the slowdown argument is this morning’s retail sales data, which shocked pundits with a 1.1% fall (against predictions of a 0.5% rise).

As we have been saying for months now, aside from the mining sector, things are patchy out there in many sectors.

The data we’ve got now suggests that the last thing many entrepreneurs needed was a November rate rise, which is likely to dampen consumer and business spending even further.

Of course, the RBA board didn’t have this data when it made its decision – which emphasises just how hard the interest rate call must be each month.

But they do have it now, and it looks safe to expect that the central bank can take their finger off the interest rate trigger, at least for a little while.

Some economist are still tipping a rate rise in March 2011, while others, like ANZ’s Katie Dean, feel the RBA can afford to wait longer.

“Our current view is that the next cash rate rise will occur in the second quarter, but the risk is that the RBA may be able to stay on the sidelines until the second half of next year.”

The good news is that this gives entrepreneurs a little breathing space. Time to hit the ground running at the start of 2011.


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