Rate rise ‘heavy-handed and unwelcome’ says business

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Rate rise ‘heavy-handed and unwelcome’ says business

Yesterday's interest rate rise by the Reserve Bank has been called ‘heavy-handed’, ‘sobering’, ‘a blunt instrument’ and ‘unwelcome’ by employer and business organisations - and it is unlikely to be the last one.

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Yesterday's interest rate rise by the Reserve Bank has been called ‘heavy-handed’, ‘sobering’, ‘a blunt instrument’ and ‘unwelcome’ by employer and business organisations - and it is unlikely to be the last one.

The ACTU says it will put working families under even more financial pressure.

Reserve Bank Governor Glenn Stevens said that a rate rise was necessary because recent information points to significant inflation pressures.

‘CPI inflation on a year­ended basis picked up to 3% in the December quarter, with underlying measures around 3½%. This was a little higher than was expected a few months ago,’ Stevens said.

Further rises

‘Indicators of demand remained strong through the second half of 2007, and reports of high capacity usage and shortages of suitable labour persist. In the short term, inflation is likely to remain relatively high and will probably rise further in year­ended terms, though the Bank expects it to moderate somewhat next year.’

The Australian Retailers Association (ARA) expressed concern at the Reserve Bank’s ‘heavy-handed’ action to raise the official cash rate by 25 basis points to 7%.

ARA’s executive director Richard Evans, after publicly stating last month that the economy had yet to feel the effects of the November interest rate rise, believes there are other things the RBA and the Government can do to help rein-in inflationary pressures.

Evans pointed to the low year-on-year growth in food as an indicator that, after a good season, food production prices have weakened with demand. He also pointed to clothing and footwear as signs that the market may be adjusting itself in consumer items without this need for interest rate intervention.

Increase productivity

‘The Government is already looking at using fiscal policy to put downward pressure on interest rates,’ he said. ‘Maybe the Government should also look at methods to increase productivity.’

Heather Ridout, chief executive of the Australian Industry Group (Ai Group), said the Reserve Bank’s statement makes sobering reading for businesses and households.

She said the determination expressed by the RBA in its decision to slow the economy suggests rates will continue to rise until inflation is contained.

‘Moreover, the RBA suggests that there may well be some way to go before this point is reached,’ Ridout said.

‘The rate rise has big implications for business. It adds to business costs, puts upward pressure on an already high exchange rate and reduces demand for products and services.'

‘Outside the booming resources and engineering construction sectors, companies are showing signs of tightening their belts in the face of increasing uncertainty around the ongoing strength of demand.’

Implications for business

NSW Business Chamber CEO Kevin MacDonald said he was concerned about the implications for business.

‘The economy is delicately poised, particularly with significant uncertainty emerging from the US economy and rising inflation in Asian economies,’ he said.

‘Monetary policy is a blunt instrument - and there will be thousands of businesses re-forecasting their budgets tonight.’

MacDonald said his comments were not meant as a criticism of the Reserve Bank.

‘The Bank has a tough job to do and has limited instruments to use in curbing inflation,’ he said.

‘Interest rate rises act like a hammer over the entire economy. The Government must focus on other economic instruments that can reduce inflationary pressures.’

Peter Anderson, acting chief executive of the Australian Chamber of Commerce and Industry (ACCI), renewed its call for a coordinated national effort to lift productivity and fight inflation, in response to yesterday’s unwelcome decision by the Reserve Bank to increase official interest rates by 0.25 percentage points.

$1.8bn cost to economy

‘This increase has been made to bring inflation under control,’ he said. ‘ACCI estimates that it will directly cost the Australian economy $1.8 billion over the next 12 months.’

Anderson said the increase is the product of strong domestic growth, high world commodity prices and a reduction in the pace of productivity growth.

‘The challenge for governments and the wider community is to now manage the economy so that inflationary pressures can be contained without resorting to the blunt instrument of further interest rate increases,’ he said.

Mortgage stress

ACTU President Sharan Burrow said unions are concerned many families could be pushed to breaking point by this interest rate rise, which will not only affect mortgage repayments, but also their credit card and other loan costs.

‘We are extremely concerned that this rate rise will mean that hundreds of thousands of Australian households will be placed under further mortgage stress,’ she said.

‘Recent reports suggest many families will be unable to cover their loan repayments and could lose their homes if rates rise much further.’

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