Save to curb inflation, RBA says

Australians need to save more for the economy to avoid a more rapid run-up in inflation, triggered by nation’s rising terms of trade, the Reserve Bank said today.

“In putting together the Reserve Bank’s forecasts it has been assumed that more of this boost to income is saved than was the case in the earlier boom in the terms of trade,” RBA assistant governor Phillip Lowe.

“This reflects two factors. The first is the different position of the federal budget and the second is the more cautious approach to spending currently being displayed by the household sector.”

The federal budget, handed down this week, contained no major increases in public spending and is expected the return to a surplus by 2012-13.

In that time, the RBA forecasts Chinese steel production will continue to drive demand for Australian iron ore and coal strong, boosting the nation’s terms of trade.

Terms of trade are the prices of a nation’s exports relative to its imports.

“If this lift in saving does not occur, then demand in the economy could well be stronger than forecast, and this would put additional pressure on capacity,” he said.

A lack of spare capacity in the economy has pushed the year-to-March inflation figure to 2.9 per cent from 2.5 per cent in the year to December, which surprised the RBA, Mr Lowe said.

“Disinflationary forces in the economy are not quite as strong as previously expected, largely because the economy has performed better than previously expected,” Mr Lowe said, in the speech delivered to Colonial First State Investment Forum in Sydney.

The RBA expects inflation to fall only to 2.75 per cent later this year, less than originally anticipated after the release of the March data.

Retail sales have remained lacklustre since the middle of last year, after the end of the government’s cash stimulus grants to households during the financial crisis. Six interest rate rises since October have also cut into demand at retailers, with a number of businesses including Fantastic Furniture, Clive Peeters and Woolworth’s flagging weaker sales ahead.

The RBA lifted interest rates to 4.5 per cent his month, creating more headwinds for shoppers. The latest rate rise added another $46 to the average monthly repayment cost on a $300,000, 25-year mortgage.

Investors currently foresee no chance of an interest rate rise in June, but predict the official cash rate will be at 5 per cent within a year, according to Credit Suisse data.

The central bank predicts 3.25 per cent economic growth this year accelerating to 3.75-4 per cent growth in the next couple of years, amid rising prices for commodities exports.

Source  :  www.watoday.com.au

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Reserve Bank risks grinding Australia to a halt – economist

FURTHER official interest rate rises could choke off consumer spending and grind the economy to a halt, economists warn.

Herston Economics chief economist Clifford Bennett says if the Reserve Bank raises the cash rate to five per cent by year’s end, the economy would “grind to a standstill”.

The current cash rate is 4.25 per cent, after the RBA lifted the rate by a quarter of a percentage point on Tuesday in an effort to further rein in expansionary pressures.

It was the fifth monthly interest rate rise by the central bank since October last year.

“If the cash rate gets to 5 per cent … the domestic economy will grind to a standstill,” Mr Bennett said.

“The only thing that’s going to be impacted by higher rates are struggling Australian families.

“We’re seeing in the Sydney press examples of them having to choose between buying groceries and paying their electricity bill and the added burden from the RBA is completely unwarranted, unnecessary and unwanted.”

RBA governor Glenn Stevens said it was appropriate to raise the cash rate towards its long-run average given that “the risk of serious economic contraction

Most economists say the average long-run cash rate is around 5 per cent.

Nomura Australia economist Stephen Roberts said rising interest rates meant consumers were paying a greater proportion of their income in servicing debt.

Data compiled by the central bank showed that when the cash rate was 3.75 per cent at the and of the December quarter of 2009, the average household was paying more than 10 per cent of its income, minus taxes and some other regular payments, on interest payments.

When the cash rate topped 18 per cent in December 1989, the average household was spending just under nine per cent of its income on interest payments.

The figures also show that in December quarter of 1989, household debt was slightly less than half household yearly income.

Twenty years later it was equal to one and a half times an average household’s yearly income.

“That data is from fourth quarter (2009) and you have to remember we’ve had two more interest rate rises already,” Mr Roberts said.

He said a lower interest rate of 3.75 per cent to 4 per cent would be more appropriate given the current difference between the cash rate and the interest rates of major lenders.

Official economic data now points to a slowing economy, with building approvals, employment and retail sales data for March all coming in under market expectations.

Mr Bennett said the data suggested Australia’s economic performance post the global financial crisis was weaker than first thought.

“When you look at the domestic economy, there are patchy elements,” he said.

“There are storm clouds on the horizon.”

Source  :  www.news.com.au

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