Rate rise won’t dent surging business investment

Business investment is likely to stay at its current high levels despite yesterday’s rate rise, potentially undermining the latter’s effectiveness in reducing inflation in the short term.

Recent Access Economics research shows the value of private sector investment in the pipeline in December jumping 55%, while business borrowing has also reached very high levels in recent months.

And Reserve Bank of Australia data released today shows business investment is responsible for more than a quarter of economic growth in the year to September 2007, behind only consumer spending.

But Access Economics director David Rumbens says yesterday’s 0.25% rise is unlikely to make any serious dent in business investment spending.

“Investment levels haven’t slowed over the last year as rates have gone up because commodities prices are still very strong and so is global demand,” Rumbens says. “Until that changes, we won’t see any slowdown.”

Rumbens’s reasoning is underpinned by the fact that the resources sector is by far the biggest contributor to business investment, so much so that even if the rate rise causes a drop off in interest rate sensitive sectors such as property, it will do little to affect overall levels.

The business investment is not all bad news, however – while it contributes to inflationary pressure in the short term, in the longer term it has an easing effect by increasing the productive capacity of the economy.

“Business investment is one of the things we need to solve the inflation problem; it will ease capacity constraints because it adds to the supply side. In the short term, people are competing for the same labour and inputs so it can be inflationary there, but ultimately it is part of the solution,” Rumbens says.