RBA has no choice

This incredible economy just keeps on throwing up surprises. This morning it’s unemployment, which fell from 5.7% to 5.5%, despite predictions from most economists that the jobless rate would remain steady.

For good measure, the ABS also revised the November figures to show that the unemployment rate was 5.6%, not 5.7% as originally published. The good news shows no signs of ending.

As CommSec’s Craig James points out this morning: “All Australians have reason to celebrate the fact that there are more people employed than ever before, with almost 11 million Aussies holding jobs.”

Of course, there is a downside to all this good news, as highlighted by the Australian dollar which shot up immediately after the jobs data was released.

Currency traders are betting that interest rates are on the way up and there’s little doubt the RBA will see it that way too – starting when the board meets in a few weeks time in February.

The vast majority of economists are tipping that rates will be lifted twice, by 25-basis points each time, in the first half of the year, taking the official rate from 3.75% to 4.25% by the middle of the year.

From there, it’s less clear how high rates are headed, although most are tipping rates will be perched at around 4.75% by the end of the year.

The only chance of that not happening is if the fledgling global economic recovery (particularly in the US and Europe) starts to run out of puff.

Higher rates will ensure inflation stays under control, but they will also put pressure on consumers (who can probably absorb the rises in the first half of the year, but might get skittish in the second half) and, of course, business borrowers, who are getting whacked by the banks time and time again.

Higher lending costs will make it hard for businesses to expand, for new projects to get off the ground and for more jobs to be created.

That’s not going to stop our recovery, but it might slow it down.