Thursday, October 25, 2007

Rate rises: Not one, but three says a major bank.

The Prime Minister's interest rate woes have deepened with a major bank predicting a series of three interest rate rises in the months ahead - in November, February and May.

The ANZ bank has told its clients that the increases will be needed in part to combat price pressure fueled by the $40 billion election campaign.

In the note to clients delivered late yesterday the bank's Head of Australian Economics Tony Pearson warned that “election promises to date point to a substantial further fiscal stimulus over the next few years, irrespective of the election outcome”...

He expected the Reserve Bank to follow its November rate rise with one in February after the release of the December quarter inflation figures and then one in May after the release of the March quarter figures.

Even with the “more aggressive” program of tightening the Reserve Bank's preferred measure of inflation was likely not to return to the middle of the Bank's target band before 2009.

The forecast highlights a widening gulf between professional economists and the Prime Minister and Treasurer with both leaders yesterday continuing to maintain that inflation was under control.

Focusing on the headline rate, regarded as of little consequence by economists, the Treasurer Peter Costello said Australia's rate of inflation was the lowest it had been for eight years.
“It has been between 2 and 3 per cent over the course of this Government. Now, there are other statistical measures which you can use to inform yourself about prices but what we are shooting for is to keep consumer price inflation between 2 and 3 per cent over the course of the cycle,” he said.

The Reserve Bank's preferred measure of underlying inflation came in at 0.9 per cent for the second successive quarter in the September figures released Wednesday, implying an annualised inflation rate of 3.6 per cent, well beyond the bank's comfort zone.

Campaigning in Perth the Prime Minister supported his Treasurer, saying, “you can't ignore the CPI and focus entirely on the underlying rate.”

The new head of the ANZ Bank, Mike Smith backed up his economists and went further telling analysts at his first profit briefing that his bank might have to increase its mortgage rates over and above the increases it passed on from the Reserve Bank because the collapse of some US credit markets was pushing up its funding costs. “That is something that cannot go on forever,” he said.

The head of the National Australia Bank John Stewart delivered a similar warning on Monday telling the Australian Financial Review that “once things settle - and probably once there is no election looming - prices will rise because credit is underpriced”.

The Treasurer Peter Costello disagreed, claiming yesterday that there was “no reason for banks to move standard variable interest rates in Australia”.

“The banks in Australia have a large deposit book, they are well capitalised, they are extremely profitable. It may well be that the level of discounting is reduced and it may well be at the margins in relation to some business lending there would be an effect, but not in relation to standard variable mortgage interest rates.”

The three interest rate rises predicted by the ANZ bank would take Australia's standard bank variable mortgage rate up to 9.05 per cent, or even higher if the banks add on increases of their own after the election as they say they will need to.

They would add at least another $213 to the monthly cost of servicing a $400,000 mortgage - $531 more than at the time of the last election.