It puts pressure on business costs and dampens consumer demand in the economy. Being the fifth rise in seven months, the cumulative effect will have a harsh and unwelcome impact on those businesses which are still on the other side of the economic recovery.
Of the 2.7 per cent growth recorded over the twelve months to December 2009, Treasury estimates that 2.1 percentage points was directly contributed by fiscal stimulus.
Treasury's estimates also predict that the unwinding of the stimulus measures will detract from growth in every quarter of 2010.
The private sector has to take up the baton from the public sector in order to sustain the economic momentum built up over the past year. As yet there is still only tentative evidence of a self-sustaining recovery taking place in the private sector, with the notable exception of the minerals sector.
Retail trade over the past eight months has been remarkably subdued with the most recent figures for February recording their largest monthly contraction in a year. Lending rates are now at a level where further increases in interest rates can profoundly dampen sentiment.
This interest rate increase should diminish the need for further rate increases in the near future. If not, the combined effect of multiple rate rises will slow the economic recovery, especially in the small business sector.
