[Peakoil] from Canberra Times today

[Jenny Goldie]

Fuel, trade trigger for rates rise
By Paul Malone 
Saturday, 15 July 2006 

An interest rate rise seems almost certain next month after soaring oil prices pushed Australia to its 50th successive monthly trade deficit in May, boosting net foreign debt close to a staggering $500billion mark. 
Commentators are already speculating that strong home loan approvals and the positive employment figures reported earlier this week have increased the chances that the Reserve Bank will lift interest rates as early as next month. 

Canberra petrol prices jumped by more than 10c in two days yet again, analysts blaming conflict in the Middle East, which has pushed crude oil prices to record levels. 

Petrol was selling for about $1.32 a litre in Canberra on Tuesday but was up to $1.45 a litre yesterday, while crude oil prices reached $US76.23 a barrel for the first time. 

The impact of high petrol prices on inflation also puts pressure on interest rates. 

Australian Bureau of Statistics figures issued yesterday showed a May trade deficit of $2.24billion, taking the deficit for the first 11 months of the financial year to $15.6billion. 

At the end of the March quarter, net foreign debt was $493billion and the continuing trade deficits are likely to see the foreign debt close to cracking the $500 billion mark when the June figures are issued. 

Exports fell by 3 per cent and imports rose by 3 per cent in May. In a major concern, exports of Australia's most important commodity, coal, slipped 5 per cent, while exports of mineral fuels dropped 22 per cent. 

Pundits had been tipping a deficit of around $1.5billion, up from the $1.1billion deficit recorded in April. 

The Opposition's spokesman on foreign affairs and trade, Kevin Rudd, said the figures marked the longest uninterrupted period of monthly trade deficits since the bureau's monthly trade series began in July 1971. 

"All this has occurred on Mark Vaile's watch as trade minister," he said. "This is the half century that no trade minister wants to knock up." 

He said Mr Vaile had given Australia an $18.7 billion trade deficit in 2005, a big contributing factor to Australia's $55billion current account deficit and the record foreign debt. The persistent high trade and current account deficits would place unnecessary upward pressure on interest rates. 

Acting Minister for Trade Warren Truss put the best spin on the figures, saying Australia's exports had achieved their highest May level on record. Imports had increased mainly because of more expensive oil and increased capital imports as resources exporters invested to expand capacity. Of the increase in the deficit during May, about $785million was due to a surge in oil imports and a reduction in oil exports. 

Mr Rudd said Australia's foreign debt made the country a bigger credit risk, and increased the premium that would have to be paid on interest rates. 

"By sustaining persistent deficits and borrowing more each year, Australia becomes more vulnerable to changes in world economic conditions," he said. In recent years, it had been easy to borrow money from overseas because some nations, in particular, China, Japan and the oil exporters, had enjoyed large surpluses and had been happy to lend to Australia. That willingness would not last forever. Japan's flow of cheap yen to the rest of the world was starting to slow. 

"If global financial markets decide that Australia is a bad risk and stop investing such large volumes of foreign capital in Australia, there will be downward pressure on the Australian dollar and upward pressure on import prices, causing the Reserve Bank to raise rates to suppress demand and keep inflation in check," Mr Rudd said. 

Commsec equities economist Andrew Mitchell said that if Australia couldn't improve its trade performance with prices for commodities at record levels, it did not bode well for the future. 

"As a resource-based economy in the midst of a resources boom, it is astonishing that Australia has just notched up a record number of consecutive trade deficits," he said. 

"While we wait for our resources sector to get capacity on line, there is no guarantee that the terms of trade will not turn against us." 

The figures came as Prime Minister John Howard played down the threat of inflation to the economy, saying soaring petrol prices should have a muting effect. 

Most pundits believe the Reserve Bank will make up its mind on an August rate rise when the inflation figures are issued on July 26. 

Any hint of growing inflation, on top of the low unemployment rate, signs of life in the property market, and the Government's latest round of personal income tax cuts, would be enough for the bank to move. 

But Mr Howard said he believed the high petrol prices were effectively curtailing spending. 

He said factoring in the impact of petrol prices, could help "suppress exuberant demand". - with AAP 




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