A further rise in cash interest rates will cause great pain to many low income families at a time of mounting mortgage stress but the Reserve Bank is only interested in economic arguments so here are three reasons why it should wait a few months.
* credit market are still brittle and exceptionally risk-averse, with the spread between the official cash rate and the rate on Australian prime residential mortgage-backed securities at 75 to 80 points, compared with a normal spread of 30 to 40 basis points;
* the Australian economy will gradually slow down of its own accord because of the wealth effect, the effects of the world economic slow-down, a higher exchange rate (reflecting larger interest rate differentials), the effects of the promised fiscal tightening in 2008/9 and the delayed effect of earlier interest rate increases (monetary policy takes about a year to impact fully on the economy and we have had three official interest rate rises in the last six months or so plus an unofficial one by financial institutions);
* many of the inflationary forces in the economy are of the cost-push rather than demand-pull variety (oil, utility prices, food etc.): they dampen demand but do not respond much to domestic monetary policy; while a rise in interest rates will reduce the risk of a wage-price cycle, that risk is really quite small in todays deregulated labour market (even allowing for the proposed Rudd Government changes).
A delay of two months will not hurt the Bank’s credibility especially if it warns that it has a bias towards higher rates.