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Rate increase a sure bet on Cup day -

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Rate increase a sure bet on Cup day

Stephen Long reported this story on Tuesday, November 3, 2009 12:10:00

ELEANOR HALL: The race that stops the nation will be preceded today by another event that appears
to be a safe bet.

The Reserve Bank is tipped to lift the cash rate to 3.5 per cent.

It will announce its decision at 2.30 this afternoon eastern summer time.

It's better than expected performance by the Australian economy that is driving these expectations
about another tightening of monetary policy but a survey by a leading business lobby group has
found that business conditions remain challenging.

Joining me in the studio is our economics correspondent Stephen Long.

So Stephen, is there anyone now suggesting that the RBA won't raise rates today?

STEPHEN LONG: Eleanor, not that I am aware of. Twenty-two out of 22 economists surveyed by the
business wire are tipping a rates rise at 2.30 this afternoon. So if they are wrong then more money
is going to be lost on the markets than is lost on the big race and last week the economist Rory
Robertson said in an interview with me that he wasn't willing to bet his life on it but he was
willing to bet mine and Eleanor I am supremely confident about my prospects of survival.

ELEANOR HALL: So the question then is by how much? Some economists have talked about a half a per
cent increase.

STEPHEN LONG: Yes, but the vast majority now think that it will only be a quarter of a percentage
point - just stock standard small rates rise. There are about four out of those 22 economists who
are tipping 50 basis points, half a percentage point, but the odds of that have declined somewhat
in recent days and when you look at it, there is no urgency for the Reserve Bank to move hastily
because the headline inflation rate over the past year was 1.3 per cent.

Now underlying inflation is stubbornly high but we have a lot of disinflationary forces in the
system. We have the unemployment rate still forecast to rise albeit not nearly by as much as it was
before. We have the effects of the government stimulus winding back and so although we can expect a
normalisation in conditions, it is not like there is some urgent inflation problem that demands a
sharp shock and so it is likely that they will take a steady, a steady hand to this and lift by
small increments.

ELEANOR HALL: Of course yesterday we heard about the turnaround in budget forecasts with the
Government now anticipating much stronger growth and fewer job cuts but the latest business survey
doesn't appear to back that up, does it?

STEPHEN LONG: This is the survey by the Australian Chamber of Commerce and Industry done in
conjunction with the Commonwealth Bank. Now let's put this in the political context. Industry and
business groups representing companies never want to see rates go up however what they have found
in this survey, which is a robust survey, is that you still had in September a contraction in
business investment. You still had a contraction in overtime being worked and so, although business
confidence has risen sharply, there isn't on the ground the objective business conditions that
suggest that business is putting its money where its mouth is so to speak.

ELEANOR HALL: Doesn't business confidence suggest though that it soon will?

STEPHEN LONG: It does suggest that it will but we are not seeing that yet and that tallies with the
other surveys that survey business confidence and business conditions and the official data.

We are yet to see the rebound in business investment. Business credit is still going backwards and
so although business is more confident, we are yet to see that translate into dollars going into
new capital and if you take away the government investment then we have zero growth, we have
negative economic growth in Australia.

So the private sector, although it is far more confident, hasn't come back yet and that is another
reason for the Reserve Bank to be steady because there is that uncertainty about what will happen
when the Government stimulus fades.

ELEANOR HALL: Now Stephen, despite the rebound in US economic growth that was announced last week,
stock market investors around the world appear still to be very nervous. What is driving that?

STEPHEN LONG: Two things. One is a sense that the huge rally we've seen since the stock markets
globally bottomed in March means that stocks are overvalued and the second is that when you boil
down those US economic growth figures, they are not nearly as strong as they initially appeared.

It was 3.5 per cent annualised pace of growth on the initial estimate put out by the Bureau of
Economic Analysis in the United States. Now 3.5 per cent sounds rosy but you break it down and half
of that, half of that came from what is known as the Cash for Clunkers program where the Obama
administration spent $3 billion to persuade Americans to trade in their old gas guzzling cars for
modern fuel efficient cars.

A smart piece of green Keynes-ianism if you like but it is not sustainable. That program actually
expired on the 24th August.

Government investment rather, government spending, contributed 2 per cent to growth and you also
had something akin to our first home buyers grant in the US adding about 0.5 per cent.

Take that all away and if you look at real private sector spending, consumption in America, things
are still negative.

ELEANOR HALL: Stephen Long our economics correspondent, thank you.