Interest rate rise in Australia- be prepared for more to come

November 7th, 2007

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It’s 9:30am in Australia and the Reserve Bank of Australia (RBA) has announced a 0.25% rise in interest rates. As we mentioned before back in February at Have we escaped from the dangers of inflation?, this trend of interest rate rise comes as no surprise to us:

… , we are very sure that as all these liquidity work its way to the rest of the real economy, it will only be a matter of time before price inflation will show its ugly head.

How much has Australia’s money supply grown since we begin keeping track of it at Degradation of Australia?s fiat paper money and Increase in Australian M3 in August? In September 2007, the M3 money supply has increased from $897 billion to $910.6 billion, which is an 18.5% increase from September 2006! This means that in monetary terms, every dollar of yours is debased by 18.5% 15.6%.

As the RBA statement says,

… reports of high capacity usage and shortages of suitable labour persist.

If the Australian economy is at full productive capacity (and any increase via investments today will take some time to bear fruit) and money supply growing at 18.5% per annum, what do you think will happen to prices eventually? Furthermore, China is not going to save Australia from price inflation (by keeping prices of manufactured goods down) because they have their own inflation problem to worry about (see China at turning point?).

Will there be more rate rises in Australia?

We would prefer not to give predictions, especially to the timing of central bankers. But given that there are 4 rate rises since August 2006 and the money supply still soared 18.5% in the year to September 2007, what do you think is the answer? This means that given Australia’s appetite for money and credit, the monetary ‘tightening’ of the RBA over the year is nothing but a farce (see What makes monetary policy ?loose? or ?tight??)- debt levels are still soaring and has yet to be curbed. Therefore, we believe this minuscule rate rise alone will have little effect in curbing the profligate ways of Australians.

Is there anything that will stop the RBA from raising interest rates further?

Yes! If the global credit crisis sweeps its way into Australia and tip her into a vicious cycle of debt deflation, then the RBA will do what central banks are meant to do- see Inflation or deflation first?:

Now, faced with the threat of a deflationary recession, what can the Fed do? Politically, it is impossible for them to allow a recession run its full course in order to clean up the prior excesses of the bubble. They will do anything and everything to ?prevent? another recession. The only way for them to do that is to do what they always did?pump even more liquidity into the economy (a.k.a ?print? money).

No one would want the RBA to stop raising interest rates for this reason.