RBA inflicts more interest rate pain: Hagop's commentary

Printing and related sectors face challenging economic times following the decision by the Reserve Bank of Australia (RBA) to raise official interest rates.

Citing strong domestic economic conditions and concerns about the build up of inflationary pressures, the RBA decided to lift official interest rates by 0.25 percentage points taking official interest rates to 7.0 per cent, their highest level since July 1996.

This latest rate hike represents the eleventh consecutive rise in official interest rates. The current tightening cycle commenced in May 2002 when official interest rates were raised from 4.25 per cent to 4.5 per cent.

Printing Industries national policy and research manager, Hagop Tchamkertenian said the decision to lift official interest rates had already been factored in by the markets when the inflation data was released in late January.

"With underlying inflation currently running at 3.6 per cent the RBA was compelled to act," he said.

"We need to now wait and see whether the recent increases will be sufficient to help slow down domestic activity and start impacting on inflationary pressures."

Hagop said the government now faced a serious dilemma - on one hand the RBA is tightening monetary policy, while on the other the government is offering a series of tax cuts which may continue to boost domestic demand.

"Based on my estimates the November decision to lift rates combined with today's decision has raised the annual interest cost of servicing mortgage and consumer debt by almost $4 billion," he said.

"Yet we know that the government remains committed to honouring its pre-election pledge of delivering tax cuts. The forthcoming tax cuts are estimated to deliver more than $6 billion to households."

Hagop recommended that printing companies reconsider their 2008 business plans in the wake of the latest interest rate increase and factor in more subdued economic growth.

"Under normal conditions the printing industry is expected to benefit from any stimulus given to domestic demand such as tax cuts. However, households knowing that the RBA is determined to bring inflation under control by lowering inflationary pressures may be inclined to save rather than spend their tax cuts.

"Under such a scenario the forthcoming tax cuts may not provide the same level of stimulus to domestic demand as past tax cuts. And with interest rates also rising, the printing and associated industries are likely to be negatively impacted," he said.