Greenspan lifts rates in U.S. 0.25%

For the fifth time since June last year the chairman of the US Federal Open Market Committee, Dr Alan Greenspan has increased official cash rates in the United States to 6 per cent.

Dr Greenspan was recently reappointed for a new four-year term and judging by the markets reaction to his latest attempt to slow down the US economy – he certainly has his work cut out for him. His actions have been aimed at dampening the wealth effect on the economy, which is being led by rampant technology stocks and Internet start-up companies.

However the Dow rose around 2% against the news of the increase in the official cash rate. US CPI is running comfortably at 3% but for how long (and against the back drop of a widening current account deficit and unemployment at a 30 year record low) is a question the Fed will be asking itself.

What this means for the domestic economy is merely a further shift in the interest rate differential between Australia and the US. Higher interest rates in the US may tempt investors to send their cash to the US for greater returns which would have further negative effect on the Australian dollar.

Still the Reserve Bank of Australia is overseeing an economy performing with vastly differing characteristics compared to that of the US. The RBA is set on blocking inflation at all costs and has been far more preemptive in its actions than its US counterpart which, it must be said, appears to be ‘one kick behind the play’.

Since the RBA raised rates in February, official cash rates are now only 50 basis points higher than two years ago. Interestingly, the latest rise in the US brings their interest rates into line with Australia – that is in net terms interest rates are now only 50 basis points higher than 2 years ago.

We see no reason to change our current view that May looks to be the next key date on the RBA’s domestic economic calendar.