Get used to more loan pain

THE message was -- should have been -- as clear as it was brutal. A message homeowners and prime minister and treasurer need to absorb. Indeed everyone.

Get used to more loan pain

If you think yesterday's rate hike is the "end of the pain" you should think again.

More rate hikes are not just possible but likely. Indeed, today's "default option" is to expect one in March.

Now this is not to suggest that it is already locked in. The Reserve Bank takes every month one month at a time, even when it has a broad program in mind.

But the clear message of yesterday's statement was that it will have to be "talked out'' of raising the official rate again in just four weeks.

Not by the PM or the Treasurer. But by "events".

Most immediately, the global financial turmoil turning seriously ugly in a way that directly affects us.

Looking further into 2008, interest rate relief is only going to come from a substantial slowing in the economy. For simplicity, businesses cutting back on investment and spending; and unemployment starting to rise.

It is important to emphasise, the RBA is not aiming to throw the economy into recession; nor will it take any collective pleasure in seeing real pain hitting ordinary Australians.

It's trying to avert even worse pain. Even higher interest rates and even more jobless.

Remember 1990 and mortgage rates and the jobless rate double what they are today?

The absolutely critical words were these. "A significant (my emphasis) slowing in demand from its recent pace is likely to be necessary to reduce inflation over time."

Simply and brutally, activity in the economy has to be slowed sharply -- less spending, less investing, less borrowing, less jobs.

It was more than a bit surprising to see so many economists view the statement as either the RBA was "uncommitted" on the next move. Or would wait for May to see the March quarter inflation number.

It is very definitely committed. It is no more going to "wait for May" than it was going to sit on its hands yesterday because of that -- distant -- global financial turmoil.

The words I quoted above take on even more telling resonance in context. They were preceded by this.

"These developments (the re-pricing of risk by lenders, leading to less or tighter lending), together with the effects of earlier changes to monetary policy (the earlier rate rises) can be expected to exert a moderating influence on private demand in Australia over the period ahead.

"But given the extent of pressure on capacity and the build up in inflation, asignificant slowing indemand ... is likely to be necessary."

Read overall, rate rises so far will work to moderate demand. But it has to be cut significantly. And even then it will only succeed in hauling back inflation over an extended period.

If there was doubt, the final sentence in the statement pointed to future monthly meetings. That they would be focused on determining whether policy was "sufficiently restrictive".

In short, there's a big job to be done.

What is the message for PM and Treasurer? Not that if you want to head more rate rises off at the pass, you'd better really slash into the budget.

The "issue" is pretty much going to be decided before Budget night in May. Any cuts starting normally in July would be irrelevant.

Indeed, they could worsen the problem if the economy was seriously slowing then.

That's the -- very unpalatable -- message. Look forward to an economy slowing sharply. The good old days are over. Until the inflation tiger is back in the cage.