Lower interest rates would help, but I doubt we'll get them

The recent inflation numbers sent the Aussie dollar up and saw most economists advise “forget anymore interest rate cuts”.

But you should never get too carried away with a one-off figure.  It is trends that count.  Also understanding the reasons behind the figures helps.

Domestic inflation surprised on the upside.  Yet it remains well within the RBA target range of between 2% and 3%.  At present the cash rate is 2.50%.

Housing-related things drove much of the recent inflation result.  This was followed by food; recreation and transport.  Much of the housing inflation has come from taxes, charges and utility bills.  Also, recent house price rises (measured here via new dwelling sales excluding land) factor in.  Fruit and vegies went up due to the weather; holiday travel/accommodation prices rose as did the cost of petrol.

A significant component of the current inflation was due to the government tax increases including the carbon tax.  Using housing as an example – property taxes and charges rose 7.9% last year; the cost of water/sewerage rose 9.3%; the price of electricity lifted 6.3% and the cost of gas/other household fuels went up 5.6%.  Remember CPI, overall, was just 2.7%.

Interest rates remain low.  The standard variable rate is below 6%; discounted rates below 5%.  Three-year fixed rates remain well below the standard variable rate averaging 5.3%.  But fixed rates are now rising, up from 5.1% three months ago.

All long-term rates now exceed the cash rate.  A year ago the opposite existed.  At the time of writing, the 90-day bank bills were around 2.6% and 180-day bills 2.64%.  Three-year government bonds were 2.96% and ten-year Aussie bonds 4.24%.

So interest rates look set to remain benign for some time to come.  But are they low enough?  Again, I think no.  Inflation is tame.  In fact, much of the current inflation is caused by unnecessary taxes and charges, which are helping stop consumption and lowering consumer confidence (which fell last week).  Lower interest rates would help.

Yet maybe now (or soon) is the time fix your interest rates.  I would like the talking heads to be wrong on this one (no more rate cuts) but I doubt it.

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