Going up

The good part of interest rates going up – I know, it’s hard to see the good part when your loan repayments have just risen – is that in this case at least it indicates that the economy is truly in recovery mode.

That assessment has been underlined today by the RBA, which released the minutes of its board meeting a few weeks ago when it decided to lift rates by 25 basis points to 4%.

The RBA is positively glowing about the state of the Australian economy.

“Members noted that the staff forecasts showed that economic activity would grow at around trend rates over the next couple of years. Indeed, some recent indicators suggested that growth might already have been running at or close to trend for a few months.”

In other words, don’t worry about waiting for the economy to hit two speed in two or three years – we may well be there already.

Even the assessment of the state of the business community was upbeat, with the Bank noting high levels of confidence, despite relatively subdued business investment plans.

Even the big four banks are warming up to the idea of a recovery in the SME market, according to the RBA.

“More generally, banks were now reporting greater willingness to lend to businesses and there were fewer reports from firms of very tight credit conditions, while liaison indicated falls in risk margins paid by some borrowers.”

That’s a particularly good sign – not only does the RBA believe bank lending to business is rising, but credit cost increases might actually be a little bit more restrained if the banks lower their risk premiums (the extra basis point added to the standard SME lending rate to account for the specific “risk” associated with a specific business) in the next few months.

The dark clouds highlighted by the RBA appear way off in the distance – over the other side of the world, in fact.

Yes, the US economy is still pretty ugly and the RBA has acknowledged that the problems in Europe could spark fresh turmoil on global markets (although the Bank says this is not the most likely scenario). But overall, the global economy is heading in the right direction.

“The central expectation remained that the global expansion would continue at a reasonable pace with significant regional differences.”

If there was one thing in the RBA minutes that provides a bit of a worry long-term, it was this line:
“Members discussed issues surrounding high public debt levels in many advanced economies. These arose not only from the significant widening of fiscal deficits over the past two years, but also the poor starting points in terms of deficits and debt levels at the time of the onset of the global recession.”

In other words, the huge borrowings undertaken by the United States, Japan and Europe to keep their economies stimulated through the GFC have now taken public debt from worrying levels pre-downturn to very scary levels today.

It makes you wonder whether this borrowing binge is going to take decades to deal with, and how that might affect long-term growth.

It also makes you wonder about the RBA’s statement that it wants to get rates back to “normal” levels as quickly as possible.

Things might be quickly returning to “normal”, but many parts of the post-GFC world look anything but.