If you had to find a single reason why interest rates are going to rise, look at this graph from the Reserve Bank.
Its the RBA’s Commodities Price Index and it is continuing to rise as the prices of commodities exported by Australia go on rising.
And while our export income continues to rise, the price we pay for many imports goes down (thanks to China’s production system) and our terms of trade improve.
That means there’s more income in the economy and its the single most important factor why the economy is doing well, why unemployment is low and why interest rates will rise.
Westpac is now saying not only one rise, probably tomorrow but a possible second one in a year’s time.
The bank said that preliminary estimates for March indicate that the Index rose by 0.9 per cent in SDR terms (Special drawing Rights), following a rise of 1.1 per cent (revised) in February.
“The largest contributors to the rise in March were increases in the prices of nickel and copper. Aluminium and gold prices fell.
“In Australian dollar terms, the Index rose by 0.5 per cent in March following a rise of 1.3 per cent (revised) in February.”
A close look at the graphic (see below) shows that the price reversals in January and briefly in February, were quickly reversed, thanks to the problems in Iran with oil and the surge in Chinese demand for copper as the country moved to replenish stocks after running them down when the price was high in late 2006.
And, judging by the way commodity prices, especially metals, look like heading, there will be another rise this month. Only the prices of some agricultural commodities, such as wheat, may be weak enough to detract from any overall rise.
Copper rose 8.4 per cent in the March quarter on the London Metal Exchange and New York crude oil crude oil 7.9 per cent.
The rise comes as the Australian dollar topped the 81USc mark and headed towards 82 USc last night on speculation we will get an interest rate rise tomorrow. It touched 81.80 USc in London overnight.
Despite some solid rises in commodity prices late last week, the speculation about interest rates took the wind out of the market and the All Ords and ASX 200 both closed more than one per cent lower yesterday.
The looming thought of a rate rise took the wind out of the market but news of Wesfarmer’s Coles raid will change that today.
The stronger US dollar will trim gains from rising commodity prices, in terms of the Aussie: it’s why the RBA also charts prices in terms of the SDR’s which are based on many currencies and are used by the IMF.
That way the influence of changes in relative currency values is eliminated.
