RBA needs caution to raise interest rate at this stage

Comments on Michael Stutchbury “Stevens signals panic has gone”, 2/09/2009, http://blogs.theaustralian.news.com.au/currentaccount/index.php/theaustralian/comments/stevens_signals_panic_has_gone/

Yes the Stevens and the RBA are likely to be on the right cause in terms of the next interest move – going up as opposed to down. The world economy is improving and the threat of a financial meltdown is gone further and further away by the day. There is little reason to suggest that the interest rate will need to go down any further.

However, given the fragile of the world economy though improving, and the relatively moderate commodity prices compared to their peaks a year or two ago, and the over-capacity in some countries that are important to Australia’s imports like China, inflation in Australia is unlikely to be a serious threat for the near to media terms, although the housing market should be watched very closely for bubbles forming. The economy is unlikely to be over heated soon.

As a result, interest rate can still be held at its current level, until other conditions both outside and inside Australia change and inflationary pressure is forming. Some of the government’s fiscal stimulus may just lift the economy to a reasonable growth state without being too excessively expansionary. Further, some of the stimulus is going to come off the boil soon, like first home’s grants scheme.

I would personally advise the RBA against raising the interest rate too early and too soon. A balance should be struck between guard against inflation and promotion of growth. In the current circumstances and at this stage, a caution on the latter is likely to be the better choice for the RBA.