The price of oil

The RBA traditionally tries to keep inflation between 2-3%. When inflation rises above 3% they look at raising interest rates to prevent further inflation growth.

So the RBA's real focus is on balancing the growth of the economy and inflation - and interest rates is just their way to manipulating the economy.

Yep, my bad.

This guy seems to be thinking along the same lines as myself.
I cannot see how an target interest rate set back in the early 90's can still be relevant today when the price of commodities has ballooned by 100's of percent.
They should revise the target rate up to 4-5 % (still not high historically) and take their foot off the interest rate pedal before we dip into recession.


Former Reserve Bank governor Bernie Fraser says the central bank may need to rethink its use of interest rates to fight inflation, if food and fuel prices keep rising.

Mr Fraser, the governor of the RBA from 1989 to 1996, and who oversaw the introduction of the central bank's inflation target of two to three per cent, said the goal for monetary policy might need to be re-assessed.

The target band may need to be reviewed if the climb in food and fuel costs reflected structural changes in the global economy rather than the regular ebb and flow of prices.

"We're not there yet but the question is going to arise, are some of these increases not seasonal, not episodic, but structural and secular?" Mr Fraser has told The Australian Financial Review.

"If we're going to be faced with secular oil prices, that's going to directly and indirectly push up inflation.

"But it would be wrong, in my view, for the Reserve Bank to respond to that sort of increase in inflation by pushing up interest rates."

People are complaining about prices seeing as inflation is currently at 4%, how would targeting this level of inflation be good for the economy??? I think the 2-3% is a good band to be in, and the last 5 years of strong economic growth proves the point!

And personally, i like this form of tough love. if people can't handle the levels of debt they have gotten themselves into, then they were being too greedy! I made sure that when i took out my mortgage that i could still afford to pay it if interest rates went up. Would i like the spare cash from lower interest rates, sure, but i understood the responsibility i was taking on when i took out the loan!

P.S. also, whoever mentioned petrol prices are up due to speculators, i think that is spot on (pardon the pun!)

Bernie, it's seasonal and people are spending too much money! Rates will eventually come back down.

When I read the bottom of page 70, it sent a shiver down my spine, Burton was talking about the 1980s! It sent a shiver down my spine because this was again the same thing that happened in 2000 with dot com boom. As there were little profits, companies were using expected sales in valuation techniques...spooky how history repeats itself. Bernie is old enough to remember (maybe too old to remember?)

Like Benny says the tough love hurts but it is best. Just because a lender says they will give you up to $1m should you take it all? Similarly to Benny, I have a comfortable margin for interest rate hikes, if I had borrowed the maximum lenders were willing to give me I'd be feeling some serious pain. Unfortunately people are too greedy and usually want everything they can get / lender will lend them. Which when interest rate rises, can be like throwing petrol on the fire if someone borrowed the maximum a lender will give them.

Personally I dont think the RBA should have decreased the rates back in October and December 2001 to raise them in May and June 2002. Hopefully the RBA has realised now that they should be smoothing it more and being more patient (and hopefully that means rates won't rise any further but stay where they are at) until we start seeing inflation back in the traditional 2% to 3% target.

PS Apologies to Bernie, ask the question, but don't expect a structural change.

Firstly if the inflation range had been revised higher in view of the huge rise in the price of oil, we wouldn't have had to endure probably 8 of the last 9 rate hikes.
Inflation will not come down while the price of oil is still rising. The stock market will not go up while oil is still rising.
People are now being hit with the double whammy of rising food and petrol prices on top of high interest rates. It's not just about people being greedy and borrowing beyond their means, the current climate is hurting everyone with or without mortgages.
When we eventually slip into recession, as now seems likely in NZ, and people start losing their jobs and companies go into receivership the RBA will realise that they misread the situation.
The USA is the cause of these problems, they have allowed their dollar to get weaker and weaker whilst advocating a strong dollar policy. In the process the oil price (why does it have to be priced in US dollars anyway?) and inflation has shot up. Now instead of putting up their own interest rates in the face of growing inflation, they instead have the cheek to tell the rest of the world to start raising their interest rates whilst keeping their own ridiculously low.. The RBA and other emerging markets shouldn't take the bait. The USA got itself into these problems and the rest of the world shouldn't have to suffer as a consequence. The USA is in deep trouble and they know it. Their Banks are being bought out by the Arabs and their title of being the worlds largest economy is about to go to China.
The RBA should be concentrating it's efforts on keeping the Australian economy growing, If we slip into recession during the biggest resources boom the world has known, what hope is there for a prosperous future for this country?

I highly doubt they will move the inflationary target as the RBA believes they "have found practical expression in a target for consumer price inflation, of 2-3 per cent per annum" (RBA: About Monetary Policy)

Price of oil always goes up (over the long term) and inflation goes up and down over time (http://www.rba.gov.au/MonetaryPolicy...run_290408.gif)

The higher interest rates are to slow spending which will eventually slow the speed of increase in general price rises (also called inflation). The RBA is trying to slow people spending.

Most international prices are priced in USD, most popular currency pairs are USD and another currency. Notice also that Gold is price in USD/Ounce. Some people also think that it should now be quoted in Eurodollars.

That's all the RBA do:

Cheers,

Dan

Dan

IMHO the RBA is failing to meet it's obligations in b and c above and
don't take my word for it, wait another 6 months and you will see it in the massive numbers of redundancies currently in the planning stages.

It's not only the high cost of borrowed money hurting businesses
it's also the higher fuel costs and more importantly it's the cutbacks and lower spending by federal and state governments.

The RBA are concentrating on bringing down an imaginary and largely
imported inflation by tightening the knot around our neck.
A bit more tightening and we will stop breathing...

If they wanted to stop people from over borrowing they could have easily done this by regulating our largely unregulated banking/lending industry.

Cheers

Hi BV,

I certainly believe that a, b and c are all very subjective and rubbery targets (who really knows when enough is enough?)

Most businesses should pass on the increased costs incrementally (obviously they don't want to price shocks to their customers/clients).

Ironically, I'm sure the RBA economists are paid quite well and probably aren't feeling the pinch as much as the Australia's working families.

I agree that ASIC should be regulating our lending industry more closely, unfortunately some members of the public are being taken advantage of by predatory mortgage brokers.

Cheers,

Dan

Australia is NOT heading for a recession! I don't know how anyone can suggest we are within a decade of a recession?????? Just because interest rates are high doesn't mean the economy will slow to such a state that we go into a recession.

Again i say, tough love. If people can't afford petrol prices, drive less or find other ways of getting around. If people can't afford food prices, spend less on your ipods, digital cameras, mobile phones, LCD tv's (or better yet, don't get them at all!). People only have themselves to blame for not being able to afford the basic necessities of life.

As for redundancies, I know both the federal and state (NSW) governments are going through some at present, but these are more getting rid of some of the people in older super funds who are too expensive to keep on the books with the budget tightening, not because they are closing down programs. But i haven't seen too many private redundancies going on (well if they are, they aren't coming to talk to any financial planners i know), and the jobs section in SMH this saturday was just as thick as it has ever been!