Wednesday, 21 October 2009

Reappearance of the genie


 It was only 18 months ago that Treasurer Wayne Swan was worried about the inflation genie having got loose and now it seems that every economic commentator is rubbing the lamp to set the beast free again.
Some of the speculation about interest rate rises to come is starting to verge on the fanciful with people whose inability to make accurate predictions speaks for itself predicting increases of two, three or even more per cent by 2012.
Historically, it looks to me that real interest rates set by the Reserve Bank have been about one and a half percentage points higher than inflation. Currently the inflation rate is falling not rising and it should continue to do so while the Australian dollar remains so strong. So if you had to guess the inflation rate in a year’s time, where would you put it?
For my money I wouldn’t be above the 3% level, so an interest rate of 4.5% compared with the current 3.25% would be about right.

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