Interest Rate Rise Likely

In a carefully worded statement issued on 7 February, the Reserve Bank of Australia (RBA) made it clear that there is every likelihood that interest rates will rise in the near future. It is expected that rates will rise by mid-year, possibly only by 0.25%, but this will be the first increase in rates for 14 months.

There is growing concern at the level of personal debt being incurred and at the underlying inflation rate that could reach 3% by the end of 2006, if interest rates remain unchanged.

The strong Australian economy over the past 14 years, now coupled with an historically low unemployment rate has triggered an increase in consumer (debt funded) spending.

At the same time, the just released 2004 Economic Survey of Australia by the Organisation for Economic Co-operation and Development (OECD) provides a strong endorsement of Australia's economic performance.

The OECD Survey notes that “in the last decade of the 20th century, Australia became a model for other OECD countries” in relation to structural reform and its adoption of medium term macroeconomic frameworks. The OECD points out that these reforms have “conferred an enviable degree of resilience and flexibility on the Australian economy”, resulting in a prolonged period of good economic performance that saw the Australian economy shrug off crises in its main trading partners, as well as a devastating drought at home.

Looking forward, the OECD expects a continuation of strong economic growth over the next two years, underpinned by strong productivity growth and accompanied by low inflation and an unemployment rate around current levels. The OECD forecasts the Australian economy to grow by 3.8 % in 2005 and 3.6 % in 2006. The OECD mentions some risks to the outlook, including around the price of oil, exchange rate volatility and adjustment in the housing sector.

For information on this article, or on any other aspect of the Australian economy or business opportunities available, please email me.

David
editor@agarcarlyon.com