Greenspan provides rates warning

The Chairman of the US Federal Reserve, Alan Greenspan, gave a clear warning overnight that the US economy was facing potential pricing and inflationary pressures which could result in pre-emptive moves to increase interest rates – possibly at the FOMC meeting in August.

Citing strong consumer spending and a shrinking labour pool as two significant threat to low inflation, Greenspan’s comments will in some ways be welcomed by markets that he is, as usual, prepared to act in advance of any signs of inflation rather than wait until they appear.

Following the recent rise of 0.25% in the US, speculation will emerge that Australian rates may rise too, but our economy, whilst it shares buoyant consumer spending, does not have the same labour shortages as the US.

We still expect Australian official rates to remain on hold for 1999. However fixed mortgage rates will continue to move in line with markets, and the days of 5 year housing rates at below 7% would seem to have gone in the current cycle.