Between a rock and a hard place

Good morning, The Reserve Bank of Australia will release the June quarter inflation report on 26th. July with economists forecasting no change to the headline rate of 2.1%pa. Given the rate is sitting at the lower end of the Reserve Bank's target range of 2% to 3% and forecast to remain there one might wonder why the Australian dollar is trading where it is on the expectation of a rate rise.

Further the latest consumer confidence data suggests that households are feeling the pressure caused by flat wages gorwth and higher living costs, something which will flow through to discretionary spending and thus contribute to economic slowing. There will still be the “I want it and I want it now” set who park purchases on a credit card simply deferring the problem to another time.

So the Reserve Bank finds itself faced with a the horrible choice of either pushing rates higher which in turn might slow demand but at the same time push the economy into a declining spiral of either rising unemployment followed by increasing consumer debt default or of increasing consumer debt default followed by rising unemployment.

Coming back to the levels of household indebtedness, especially in this country, the dependence on credit for economic growth, a tightening of credit conditions leads to an accelerated slow-down which is hard to predict and even harder to control, once it sets in.

Quite the rock and a hard place.