Rate rise: miserable news for business

8/10/09: 'Rate rise: miserable news for business' - RBA Director, Roger Corbett and I were on stage at a Connect 09 function just hours after he had waded through Board papers inches thick to agree to an interest rate hike of 25 basis points.

The fact that the RBA has raised rates comes as no surprise – the rate could hardly have been set any lower after a 6 month emergency low of 3 percent to protect the economy – the lowest it has been in 50 years.

Common sense says the only way it could go is up – on its way some say to a steady 4 percent in the next 12 months and to 5 percent in the next 24 months. Only the timing of the rise has raised eyebrows.

Although I understand (and am somewhat in awe of) the delicate balancing act of supporting our comparatively stable economy – it’s miserable it couldn’t have been left till after Christmas as far as I am concerned!

And I am sure retailers would agree – as would the manufacturing, service and construction sectors where sales remain flat and business is tough.

Particularly as after the recent G20 meeting, consensus was that it is too early to be predicting the good times are back.

But in a first step towards normalisation, this action does signal the beginning of the start of the process to recovery.

A gentle nudge perhaps rather than an aggressive, speedy action, but nevertheless a start.

Let us tread carefully however – we have a way to go yet and the pain has not subsided. Credit is still tough, sales are down and unemployment is still painful for many – no more is that felt as acutely than in the small business sector where shirt sleeves have been rolled up in deadly earnest for some 15 months now.

But it is with some pride, that we are the first country worldwide to be taking active steps in a positive show of economic recovery.

The hike makes Australia the first of the G20 to move and the second developed nation after Israel to start unwinding the extraordinary and unprecedented stimulus of the global credit crisis.

We even impacted Wall Street, as US shares rallied after Australia's decision to raise interest rates boosted confidence.

By his actions, Glenn Stevens is making a call, the worst is over.

Reasons have been cited as follows: economic conditions in Australia have been stronger than expected and measures of confidence are recovering; unemployment has not risen as far as expected; housing credit growth has been more solid and prices have risen appreciably over the past six months.

Although the actual impact of the rate rise is arguably minimal in itself, the biggest impact, threat or promise (whichever way you are set) is the impact on the mindset of consumers and as a consequence, consumer dependant businesses.

The increase in itself, is the first step in signalling the end of the down cycle and we are likely to see both higher rates and higher mortgage repayments forthcoming.

In addition, the likelihood of further appreciation in the Australian dollar could have a considerable impact on export oriented businesses. The rise will also intensify debate about the plus and minuses of the withdrawal of the government's fiscal stimulus package and the timing of the decisions around this.

Was this expected? Interestingly, 19 out of 21 analysts polled by Reuters had forecast a steady rate of 3 percent, with two looking for a hike to 3.25 percent.

However, the odds narrowed sharply on Monday after two influential columnists wrote that a hike on Tuesday looked likely given the surprising strength of the economy.

Many thought the RBA would hold off until November at the earliest to assess more data, including the consumer price report for the third quarter due later this month.

RBA Governor Glenn Stevens stated last week the unusually low cash rate would have to be raised in a timely manner to avoid over-stimulating parts of the economy.

Well heads down again friends. I forecast a 25 point rise at least 3-4 times over the next 12 months – so brace yourselves, we could be back to normal before too long. Get those mortgage rates fixed – the honeymoon may be shortly over.

For the record, and for the third week in a row, the Council of Small Business of Australia when called, had no opinion!

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