Why the RBA is getting worried – and rates are heading up: Gottliebsen

I want to take you back almost six years to February 2005. At that time the All Ordinaries index was around the 4,400 level, having risen more than 50% in the previous two years or so. It was to suffer a correction later in 2005 and then go on to rise another 50% in the next two years.

Why is February 2005 so important? That’s the last time the Roy Morgan Consumer Confidence index was higher than the level it reached last month. The Morgan consumer confidence index is at 130.1, which is a rise of about 10% from a low in May and a whopping 40% above the very low points reached in 2008-09.

Add to this high consumer confidence the fact that 34% of Australians say their family is better off than a year ago, 43% expect their family to be better off in a year’s time, and 63% say that now is a good time to buy major items, and you have a very clear picture of the state of consumer-land.

Australians are feeling very good about life and, unless there is a sudden adverse event, we are headed for a strong Christmas sales period, which is good news for retailers.

I am not in the business of predicting what the Reserve Bank will decide on Cup Day, but it’s difficult not to when you see confidence building in the way we are now seeing. If it is not restrained, it will lead to a retail boom.

The Reserve Bank is very nervous because we also have a mining-investment boom coming and it is not keen to add rapid consumer growth to the mix. Current inflation levels will tempt the Reserve to hold back interest rate rises, but the Morgan figures herald an environment for significant increases in the year ahead.

Many retailers have been experiencing tough times over recent months because shoppers have been very price-conscious. If the RBA does not increase interest rates tomorrow, there is a very good chance that there will be an opportunity to lift margins a little over the pre-Christmas period.

There is no doubt that there are significant areas where people are struggling, but job security and the strong employment market mean that Australians have been able to put aside recent rate rises. At the same time, investing and retiring Australians have enjoyed higher deposit rates, a higher sharemarket and strong house prices, which have lifted their confidence.

You will remember that I alerted you to the rise in demand for accountants as being a clear sign that we have reached the second stage of recovery (See Australia is ready for lift-off, October 26). Now we have consumer sentiment as well.

At its last meeting, the RBA appeared to be split over whether to lift interest rates. Within a few months – or earlier – those divisions will have evaporated and we will have higher rates.

This article first appeared on Business Spectator.