Wednesday, October 24, 2007

Going Up. And the Coalition is rooted.

In a nightmare scenario for the Coalition the Reserve Bank is set to make history by increasing interest rates on Wednesday November 7 - two weeks before Australia goes to the polls.

It is then expected to increase them again by a further 0.25 per cent shortly after the poll, bringing Australia’s professional cash rate to 7.0 per cent - within striking distance of the 7.5 per cent bequeathed to Australia by the outgoing Keating government in 1996.

Australia’s Reserve Bank has never before lifted interest rates during an election campaign and until this year had not even increased during the year of a campaign...

The measure of inflation most watched by the Bank, the so-called “trimmed mean” calculated for it by the Bureau of Statistics, came in at 0.9 per cent for the September quarter, the second successive quarter it has done so, and sharply more than the 0.5 per cent and 0.6 per cent reported in earlier quarters.

The result suggests that Australia’s annualised rate of inflation is already at or beyond the top of the Reserve Bank’s 2 to 3 per cent target zone.

The other measure of underlying inflation calculated for the
Bank, the so-called weighted median, came in even higher at 1.0 per cent – the worst quarterly result since 1991.

For the Bank to take no action at its board meeting on Wednesday week would be to invite a third successive such result and to concede that it had lost control of inflation.

In immediate reaction to the news yesterday economists from the ANZ bank said it “sealed the deal” for November rate rise, the National Australia Bank said for the Reserve not to act would be “against its charter” and TD Securities said if the Bank did not move, it would mean “unambiguously” that it was politically biased.

Its global strategist Stephen Koukoulas added that “given that this is the not the case and that the Reserve Bank Governor Glenn Stevens is a man of the utmost integrity and professionalism, it is 100% certain that interest rates will be raised at the next board meeting”.

Westpac, the National Australia Bank, the ANZ and the Commonwealth Bank are all warning of the possibility of a further interest rate rise beyond November’s, with Westpac telling clients that given that the Reserve Bank board does not meet in January the only question was whether it will wait until February or do it in December.

The interest rate outlook pushed up the Australian dollar by more than one US cent to a high of 90.49 cents as futures market trading priced the likelihood of a pre-election rate hike at 83 per cent.

The Treasurer Peter Costello at first focused on the headline inflation rates of 1.9 per cent for the year and 0.7 per cent for the quarter declaring them “really right bang in the middle of the target range which the government has set for consumer price inflation” before conceding that “other measures of inflation, more technical measures, are up around the upper limit of the band”.

The headline rates were artificially depressed by a change in the way the Statistician accounted for the 30 per cent childcare tax rebate. Previously paid though the tax system it was not regarded as reducing the price of childcare, but since July it has become a direct payment and been incorporated in the measured price. The change cut 33.4 per cent off the apparent price of childcare in the figures released yesterday, when in fact the price was broadly unchanged. Bureau staff told the Canberra Times that without that technical change Australia’s headline rate of quarterly inflation would have been 0.9 per cent rather than 0.7 – the same as Reserve Bank’s preferred measure.

Mr Costello said he would not be drawn on how the Reserve Bank would react or whether a pre-election rate hike would sound the death knell for the Coalition, invoking instead the prospect of a recession if Labor was elected.

“If we were to go back to union control of workplaces and go back to pattern bargaining and moving wages by awards from profitable to unprofitable sectors of the workplace, you would unleash such inflationary pressures in this economy as would end in recession as has always happened in past periods of economic growth,” he said.

Asked how soon Australia would run into trouble should Labor be elected the Treasurer said that would depend on how militant unions became.

The Labor leader Kevin Rudd described the response as “a remarkable piece of political stagecraft by Mr Costello, Academy Award-winning in terms of avoiding responsibility.”

A November rate rise will be the sixth since the Prime Minister went to the last election promising to keep interest rates at record lows. It would increase the monthly repayment on a $400,000 mortgage by a further $67.00.