Australia entering in hyperinflation? (update 6)
Posted by Adrian on April 23, 2008
The Australian current cash rate is at 7.25%, behind the New Zealand cash rate at 8.25%. Both high cash rates have been implicated by both the Reserve Bank of Australia and The New Zealand Reserve banks in an effort to contain inflation. Australia, like most of the developed world, ran a hot property market. When the credit crunch hit last August in 2007, the governments and banking press of course played down global problems with the credit markets and higher interest rates on short term and long term loans. The public was unfortunately mislead, in regards to the severe nature of a credit freeze in global markets and the RBA decided to hold rates until early 2008. Until the banks all disclosed their problems with interbank funding, this created uncertainty in the market at the same time. Some mortgage brokers went under, or were bought by banks, property trust that were heavily leveraged went bust – and liquidity in the Australia credit markets started top dry up. Hence the RBA injected funds into the banking sector through out the early months of 2008. Bank stocks in Australia were slaughtered, dropping the All Ords down -20% in the last quarter. In all this turmoil, the banks have been passing up costs to the consumer, namely interest rates from 0.5% up to 1.00% on loans. These increases have been incremented and almost timed with the RBA interest rate hikes that have brought the Australian cash rate now to 7.25%.
With overseas investors looking at high yield currencies, this has also inflated the Australia $, pushing the dollar v’s the USD to 0.95 cents. The Australia economy, in someways is a smaller version of Europe in the sense that both Europe and Australia are desperately trying to contain inflation – although Europe suffers from the disproportional asset devaluation in some countries and a plateaued or rising assets in others, like Germany. However the AUD like the EUR is edging up to an inflated level (which may be intervened by sovereign funds – selling the EUR, to offset the collapsing USD). So both Europe and Australia with high yielded currencies, rising costs and inflation, declining markets (not all) shows that stagflation is now testimony to economies that have acted slow on interest rate hikes, and allowed inflation to overtake rapidly.
The fear that both the RBA and RBNZ have, is when the economy does slide further into a recessionary decline. To what point does the banks cut rates? if so, a rapid depreciation of the AUD and NZD could take place and at the same time that inflation is still not contained. Which moves both countries closely into hyperinflation.
Recent Australian CPI figures shows an increase of 1.3% from 3.0% December 2007, now at 4.2%. Although it could be higher.
I suspect the RBA will not lift interest rates in May (next meeting), nor do I think they will lift them later this year. The banks however will continue to pass on costs through their own interest rates on loans. The RBA would hope that this will slow the economy or send it sharply into a recession. In which the reserve bank then can cut interest rates later in 2008.
The banks will can get the blame for a recession.