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RBA too quick on the trigger: report

07-12-2010
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The Reserve Bank of Australia’s (RBA) interest rate rise last month may have been premature, says leading industry analyst and economic forecaster, BIS Shrapnel.

The RBA is clearly worried that the coming mining boom and current strong employment growth will lead to serious capacity constraints and inflationary pressures, says BIS Shrapnel’s latest Economic Outlook Bulletin.

But it warns the economy has hit a soft patch since mid-year and, at this stage, the recovery is still fragile.

“The RBA should have waited and kept its powder dry,” says report author and BIS Shrapnel senior economist, Richard Robinson.

“The economy will experience these pressures, but they will manifest later, not next year, and the effects of this mining boom will be different to the pre-GFC resources boom.”

The report says mining investment appears to be the only sector ready to pick up the slack.

“Higher interest rates have a disproportionately greater impact on the tradeables sectors via a higher Australian dollar,” says Robinson. “This lowers growth in output and employment in the manufacturing, education services and tourism sectors, and also helps the RBA achieve its goal of slower employment growth.

“While the RBA is aware of the effects on housing and the broader economy, its charter is to keep consumer inflation in a two-to-three per cent band over the medium term. As it has no control over a rampant mining boom, the RBA effectively acts to curtail other sectors to make room for mining – housing and the tradeables sectors thus become the ‘collateral damage’ of the mining boom.”

BIS Shrapnel says it is not sensible to derail the housing recovery. There is already a serious deficiency of dwelling stock and recent approvals data indicates current building is well below underlying demand.

“The latest rate rise will mean a further delay in this much needed upturn,” says Robinson.

While BIS Shrapnel remains confident the housing sector and business investment will continue to add to the economy, their contributions remain under threat if the RBA raises interest rates too quickly.

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