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http://www.residex.com.au/newsle ... mp;from=news0308aMC


Will the RBA increase rates further?

By JOHN EDWARDS


This is a different question to whether they should. Even though the economy is slowing, my best guess is that we will see more rate rises. They will come from either the RBA or the Banks or both. I know previously I didn't believe this would be the outcome. My attitude has changed as the RBA seems to be more intent on keeping inflation in check than anything else. There are now new things happening in the economy which will cause inflation even as the economy slows. Oil prices are increasing significantly (this will flow into food and other goods and services), China is going to export inflation, there is wages pressure, and our dollar's growth is slowing and even currently falling in value. In the recent past its growth helped to protect us from inflationary pressures.

The, "should they", is more interesting and for me the answer is no. It will be very easy for them (RBA) to overshoot and perhaps they already have. Sometimes we just have to have inflation. Their problem is that governments throughout the world, in my view, have made a fundamental mistake. They gave up the right to control who provided credit and focused on solely managing inflation using interest rates. In the current situation the blunt tool "interest rate management" can be simply too blunt. They had no method of managing specific asset bubbles. Manage one and impact on all. The stock market bubble needed management but they failed to act as they couldn't without impacting the total economy. Likewise, the housing bubble of a few years ago needed management and they largely failed in that process also because they had given away the tools on management. In fact, the US more clearly than our government failed dramatically. The tool they needed was simply to have control over who and on what basis a party was able to lend money and what capital was needed to be set aside for the particular risk a lender was taking. As a bubble grew the control should have been simply, increase the capital required to support the lending process. Yes, a form of credit control, still using interest rates but targeted to specific areas of a market. Interest rates for a product increase as lenders pass on the cost in increased capital required to support a lending activity.