Interest rates up 0.25%

The Reserve Bank of Australia has lifted interest rates by 0.25% to 7.25%, but the moderate tone adopted by RBA governor Glenn Stevens in his statement accompanying the decision suggests the central bank is not certain to lift rates again in the short term.

While “high capacity usage” and “shortages of suitable labour” are still a problem, Stevens acknowledges that the overall tightening in financial conditions since the middle of 2007 have been “substantial”.

There are now signs that the multiple RBA and bank interest rates rises are starting to have some effect, Stevens says, with “tentative evidence” of some moderation in household spending and credit, and business and consumer sentiment softer recently, with household credit demand slowing somewhat.

The key question now appears to be whether this tentative moderation will translate into something more sustained, particularly in the context of a possible recession in the US and slowing global growth.

In the absence of concrete signs that heat is coming out of the economy, more rate rises could be on the way however, with Stevens pointing out that “significant slowing in demand from its pace of last year is likely to be necessary to reduce inflation over time”.

NSW Business Chamber chief executive Kevin MacDonald says today’s rate rise should prompt the Federal Government to closely examine whether its promised personal tax cuts will put upward pressure on inflation.

While stopping short of calling for the Government to abandon the tax cuts, MacDonald says it should ask Treasury to prepare a public report examining the effect they will have on the economy.

“There is no point in providing major PAYG tax cuts in July, if they are whipped out of everyone’s pockets by the Reserve Bank in August and September,” MacDonald says.