Today’s RBA will heed history's lesson

Tuesday’s RBA meeting, or rather it’s announcement of a 25 point rise the following day, caused a few ripples amongst the tea-leaf watching brigade, but as it was so generally expected, hardly any waves. Translated into dollars and cents for borrowers, the daily additional repayments on a $200,000 variable loan will amount to just $1 per day. This should put into perspective a number of factors worth remembering. Firstly that the RBA is attempting to reign in a number of aspects of the economy without stopping it dead in the water. For those who can remember back to August 1994, the then RBA Governor, now some time media star, Bernie Fraser raised rates three times over a period of just five months. That wasn’t too bad, but the three rises in question totalled 2.75%, taking the then cash rate from 4.75 to 7.50% by Christmas. As rates had been falling consistently prior to this time from the astronomical levels of 18% in January 1990, the effect was devastating for the economy. Business and consumers reacted as if whiplashed, passing the effect on to the economy, and apart from a 10 month period from November 1999 to August 2000, we have seen falling rates ever since. We won’t however credit Bernie with the low rates of the past few years since his retirement. Enough of history however, back to the future. In spite of record household debt, it will take more than an extra $1 per day on mortgage repayments to slow down retail spending or the housing boom, so expect more rate rises down the track. No surprises here either, for isolated moves in the cash rate are almost unheard of. However we don’t expect Fraser type increases from his highly successful successor Ian Macfarlane, who, like Alan Greenspan in the US, has made an art form of small, frequent and pre-emptive moves to successfully fine tune the economy through a the global economic minefield. How many rate rises and by how much? While some economists are predicting 1.5 and even 2% over the next 12 months, we expect that consumers, and the new lean look business sector will be more sensitive than that. So while the first .25% will pass most household budgets with not much more than a muttered murmur, two or three more over the next six to eight months should see a change in spending habits. This assumes that the overall fiscal lead from Peter Costello at next Tuesday’s Budget continues to deliver a surplus, an oft-neglected basis of the Australian economy’s current health.