more pain to come, page-21

Rate rise certain as inflation soars
December 22, 2007 - 5:35AM

Interest rate hikes are almost a certainty following Treasury predictions inflation will rocket to four per cent by March.

Internal forecasts obtained by The Weekend Australian newspaper reveal Treasury expects inflation to rise above three per cent throughout next year, meaning home buyers could face interest rates of close to nine per cent.

Treasury calculated the forecast using the latest official inflation figures for the September quarter and the latest national accounts.

"I warn you we face an extended period of elevated inflation," federal treasurer Wayne Swan said last week.

However, Mr Swan refused to comment on the Treasury forecasts, The Australian reported.

Interest rates have risen 11 times since 2001, lifting standard variable interest rates from 6.05 per cent to 8.55 per cent.

COMMENT

Interesting situation playing out here. Due to this subprime lending problem, banks all around the world aren't lending as much and what they are lending is costing more with higher interest rates. Business is spending less on growth.
People are having to paying higher interest rates as well. Demand in the general economy is also declining. People are buying less and business is slowing.
What the RBA needs to do is lower interest rates to kick things along. But they can't; that will lead to more inflation.
Now the RBA finds that inflation is getting out of control and instead of cutting rates, they are being forced to raise rates. If they don't inflation will get out of control.
Of course another rate rise will already compound a decline in the economy. However if it doesn't do this there will be massive asset inflation and the economy getting right out of control. The RBA is in a no win situation. It is damned if it does and damned if it doesn't.
It is just as that Indian chappy is saying.
The RBA is really only there to control the money supply and inflation so the chances are that interest rates will go up for sure.
But all the while there will be a lot of pressure on the RBA to not raise interest rates, which of course will lead to massive asset inflation.
Even though Wall St rallied 200 points on Saturday, I'd say the ASX will go down as their is more pain to come.
Better to be in cash and gold for sure.