I read this article recently at news.com.au
Homeowners can expect a string of rate rises ahead of the planned carbon pricing scheme if the Reserve Bank follows what happened when the GST came in, economists said recently.
The reform is the biggest since the tax started in 2000 and while raising just a third of the GST revenue, experts are using this as the best indicator for what may happen as the Reserve battles to keep inflation in check. The RBA upped rates three times in anticipation of the GST and once after its introduction to keep the economy steady. While in broad agreement with the Government’s 0.7 per cent inflation prediction, economists say the biggest danger will come if the carbon scheme triggers further inflationary wage rises – so-called “second-round effects” – as workers endeavour to cope with price rises.
“The most prominent of these (effects) will be if households take into consideration higher levels for prices,” HSBC chief economist Paul Bloxham told The Herald Sun. “There is very little risk interest rates will be lower but there is a possibility interest rates will be higher as a result of the carbon tax, albeit a minor risk.” NAB chief economist Alan Oster agreed: “The big issue for the RBA is will a second-round effect flow through to inflationary and wages expectations. If they do then we expect the bank will go.”
JPMorgan chief economist Stephen Walters said the RBA had effectively been tightening interest rates ahead of the carbon tax introduction with its string of hikes last year The Australian reports. Mr Walters also said the central bank would be concerned if workers worried about the cost of living began pushing for wage rises. “A big threat is going to be wages,” he said. “If we see electricity prices go up by 5 per cent rather than the 3 per cent forecast, the unions are going to start to push for higher wages in addition to the compensation on offer.
“That is a clear second-round effect and that is when it becomes material.” TD Securities strategist Roland Randall said the potential inflationary impact could prompt the RBA to keep interest rates tighter than had been anticipated. The National Australia Bank is forecasting one interest rate rise this year and another in May.
