Wednesday, April 04, 2007

Will the Reserve Bank hike at 9.30am Australian eastern time?

In the words penned and sung by the legendary Brian Wilson, God only knows.

The announcement will be here at 9.30am Australian eastern time.

Here's my report delivered to the streets of Canberra only hours before...

Mortgage repayments are set to climb by an extra $60 a month if, as expected, the Reserve Bank tightens interest rates at 9.30 this morning.

The weight of money on financial markets is clearly favouring a rise, with the prices on the bank bill futures market putting the chance of a hike today at 62 per cent and the chance of no change at just 38 per cent.

A hike of 0.25 per cent would take the professional cash rate to a 10-year high of 6.5 percent and take the standard variable mortgage rate to 8.32 per cent.

It would be the fifth interest rate hike since the 2004 election, fought and won by the Coalition on a promise of low interest rates.

In that election the Prime Minister delivered his policy speech from a lectern that read “Keeping Interest Rates Low” but yesterday, ahead of the Reserve Bank board meeting, he told reporters that he had made his practice not to comment about what would happen to rates.

The Opposition leader Kevin Rudd accused him of running for cover saying “he no longer talks about interest rates because there is this huge gap between what he promised the Australian people in paid advertisements by the Liberal Party at the last election – that he would keep interest rates at the level that they were at that time. And they have gone up four times since then. That’s why you don’t hear Mr Howard every day talking about interest rates”.

A hike in an election year would be a serious embarrassment for the Coalition, drawing attention to the successful campaign strategy it adopted in the last election.

One of its tools was an “interest rate calculator” produced by the National Party that encouraged voters to dial up what said would be their unchanged mortgage repayments under the Coalition with two scenarios for higher repayments under Labor.

Should the Reserve Bank move this morning, as it has signaled forcefully it might, the monthly repayment on a $400,000 mortgage would climb by an extra $60 to be $320 higher than at the time of that election.

Labor’s leader Kevin Rudd signaled the Opposition’s line of attack saying that “Australian people, working families, were promised by Mr Howard at the last election that he would keep interest rates at record lows”.

“What has happened since then is interest rates have not gone up once, they have not gone up twice, they have not gone up three times, they have gone up four times all together. And as a result, housing affordability is a real challenge out there for working families,” he said.

Rather than aping the Coalition in 2004 and promising to keep interest rates low he promised to “work to improve housing affordability over time”.

The Treasurer refused to buy into the discussion ahead of yesterday’s Reserve Bank board meeting saying that anything he said would be misinterpreted. He said although he had appointed the board it was independent and would make its decision without reference to him.

The board met in Melbourne yesterday, Mr Costello’s hometown. Sitting on the board is the head of his department Dr Ken Henry, and Costello appointees Roger Corbett , the former head of Woolworths, Jillian Broadbent, Graham Kraehe, Donald McGauchie, Warwick McKibbin and Hugh Morgan as well as the Reserve Bank Governor and Deputy Governor Glenn Stevens and Ric Battellino.

In the background of the meeting was the knowledge that if the board did not act immediately it might feel forced to push up rates later at even more embarrassing times for the government – just before or just after the May Budget or during the election campaign itself.

The Bank signaled that it was considering a hike only three weeks ago. Its deputy governor delivered a speech in Sydney declaring that Australia’s inflation outlook was “higher than ideal” and that inflation was “more likely to be too high than too low in the period we can foresee.” He said the board would review inflation prospects “month by month”.

The resolve of hardliners within the bank is likely to have been strengthened at yesterday’s meeting by Monday’s news showing that retail spending surged in January and February, despite two rate rises in August and November. It was the strongest surge since the one that brought on the interest rate hike in May last year.

The interest rate strategist at the Macquarie Bank Rory Robertson said yesterday he thought the board could go either way. But he said so thoroughly had the Bank prepared the market for a rate rise that if it did not hike, traders would lose some faith and be “less inclined to respond to the next round of prodding.”