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Interest rate rise would stifle housing inves -

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Interest rate rise would stifle housing investment recovery: economist

AM - Monday, 22 October , 2007 08:24:00

Reporter: Peter Ryan

TONY EASTLEY: This week's big political and economic focus will be inflation and whether official
data out on Wednesday will trigger an interest rates rise in the middle of the election campaign.

All eyes will be on the Consumer Price Index (CPI) for the September quarter. Any inflation spike
could force the Reserve Bank's hand when the Board meets on Melbourne Cup day.

Meanwhile, the housing shortage brought on by a surge in migration is being cited as a major
contributor to the official inflation result. The economic forecaster, BIS Shrapnel, says any
interest rate rise would stifle a much-needed recovery in housing investment.

BIS Shrapnel economist, Jason Anderson, has been speaking with our business editor Peter Ryan.

JASON ANDERSON: Clearly we aren't producing enough in terms of the rate of dwelling construction
and there is a need now to articulate how governments are going to respond to an environment really
which has changed very quickly in terms of that overseas migration and the population gain, but
it's now becoming much more important in terms of the outlook for inflation and we can't set aside
yet as the temporary phenomenon. This is an issue that will be with us into the next couple of
years, at least.

PETER RYAN: So you see the rental shortage being a dominant factor in the determination of the
inflation number for sometime to come?

JASON ANDERSON: It will continue to attract a lot more attention and the real problem then is any
policy action to remedy or try and address the imbalance between supply and demand, will take quite
sometime to come through, and in the mean time there will certainly be an acceleration in rentals
and with that in mind, it's a difficult balancing act, I think, for the Reserve Bank, because, yes,
it's contributing to acceleration in consumer prices, but on the other hand, any policy action will
probably dampen still, the rate of dwelling construction and that of course then has feedbacks in
terms of extending the imbalance between supply and demand.

PETER RYAN: Depending on Wednesday's CPI result, what pressure do you think will be on the Reserve
Bank when it means on Melbourne Cup day to decide another rates rise.

JASON ANDERSON: I think the decision is going to be very evenly balanced. And I think there is a
need to look at, obviously, the wider context in terms of consumer spending. We have seen a
re-acceleration in terms of household spending growth. The housing market conditions, with the
exception of Sydney, seem to have had life, new life breathed into them over the last six months
and that would indicate that the impact of the rate rises that we had last year, obviously the
evidence is yet to come through in terms of the August rise, have not been that substantial. So,
also when you add to that, the fact that the employment growth figures remain solid means that it's
going to be quite a difficult decision.

TONY EASTLEY: Jason Anderson, from BIS Shrapnel, speaking with our business editor Peter Ryan.