Wednesday, August 08, 2007

Interest rates: What a bizarre day...

Strange, unnerving.

I don't just mean John Howard disowning the claim in 2004 Liberal Party advertising that if reelected he would “keep interest rates at record lows”.

"The Liberal Party ran many advertisements. May I remind the Leader of the Opposition of what I have said previously in the House. He can scour every transcript, and I will make them available, of every interview that I gave during that election campaign and he will find no such commitment.”

As Kerry O'Brien asked Peter Costello later "are we not to believe Liberal Party advertising?

I am referring Labor's strategy of playing dead. Rudd and Swan's 35-minute press conference was excruciating, soul destroying for people like me who still like to think that politicians will tell the truth and engage in debate.

It was made all the odder by Labor's decision in the afternoon to call on debate on a motion about “the failure of the government’s economic policy to put maximum downward pressure on interest rates”.

Labor's two chief leaders in this field had spent 35 minutes telling us they wouldn't do anything very different.

Some extracts:

RUDD: Our budget orthodoxy is identical to the Government’s on this and there is no slither of light between us. That’s just the bottom line.

SWAN: I’d like to take up the point about the tax changes because they were tax changes we suggested which the Treasurer put through finally. And why did we support them? We supported them because they were quality spending, because they actually were aimed at lifting participation. Yep, lifting participation.

They didn't want to acknowledge that throwing $31 billion of tax cuts into an overheating economy might be causing some problems, because then they would have to oppose the tax cuts, wouldn't they?

Story below the fold:

An unprecedented pre-election hike in interest rates has sparked talk of a follow-up, perhaps as soon as November.

The Reserve Bank yesterday pushed up its so-called cash rate by 0.25 per cent to a decade-long high of 6.50 per cent - the first time it lifted rates in an election year.

All of Australia’s major banks said they expected to add 0.25 per cent to their variable mortgage rates in response, the fifth time they have done so since the last election in which the Coalition promised to “keep interest rates at record lows”.

In his statement the Reserve Bank Governor Glenn Stevens flatly contradicted Ministers including the Treasurer, Prime Minister and Finance Minister who had said that inflation was under control.

The Governor said that the high consumer price index recorded in the June quarter “indicated a less favourable near-term outlook, with the implication that any further increases in inflation would take place from a higher starting point than previously.”

He said the Bank’s board had judged that “a somewhat more restrictive monetary policy setting was required in order to keep inflation consistent with the target in the medium term”.
The announcement was followed by news unavailable to the board when it made its decision suggesting that last year’s three rate rises have failed to dent borrowing secured against real estate.

Housing finance data released by the Bureau of Statistics showed that lending to owner-occupiers, excluding refinancing, jumped by 2.2% in June to be the 12.4% higher than last November.

Investor finance jumped 14.8% in June, associated with the superannuation changes ahead of 1 July.

House prices are reaccelerating in every city other than Perth and Darwin, climbing by 3.2 per cent in the June quarter, and 9.2 per cent over the year.

Canberra prices have climbed 9 per cent in the last year, notwithstanding last year’s three interest rate hikes.

ANZ economist Paul Braddick said that those rate hikes had been “more than offset by a combination of solid gains in average household incomes and significant income tax cuts”

While yesterday’s rate hike would have some impact, he said it would be “insufficient to derail the momentum in house prices.”

The ANZ said it expected a follow-up rate rise by the middle of next year.

Westpac said it expected one in November or December following the release of the next inflation figures due on October 24.

TD Securities said it expected the hike on the earliest possible occasion after inflation figures, which would be on Wednesday November 7, the day after the Bank’s November Melbourne Cup day board meeting.

In a note to clients the firm’s global strategist Stephen Koukoulas said that “to not hike when sound and prudent economic management demand such a move would reopen the independence issue”.

John Howard yesterday attempted to draw attention away from the rate rise and towards tax cuts saying that he was aware that the rate hike would “hurt some homebuyers” but that that was “all the more reason that we were very pleased that we had a sufficiently strong budget position to provide tax relief and other benefits to other families in the recent budget.”

Those tax cuts and benefits - amounting to tens of billions of dollars - run the risk of stoking inflation and increasing the pressure on the Reserve Bank to act again.

But yesterday’s statement from the Bank made no mention of the tax cuts and both the Labor leader Kevin Rudd and his Shadow Treasurer Wayne Swan were keen to play down their impact. Mr Rudd said he was in “lock step” with the government on fiscal policy with a position that “mirrored” the Coalition’s. Mr Swan described the budgeted tax cuts as “quality spending”.

The Treasurer Peter Costello later savaged them for bringing on a debate about “the failure of the government’s economic policy to put maximum downward pressure on interest rates” when they hadn’t clearly said how their policy would be different.

Confronted in question time with the wording of a 2004 Liberal Party advertisement that said it would “keep interest rates at record lows” if returned to office Mr Howard disowned the advertisement saying “the Liberal Party ran many advertisements.”

“I remind the Leader of the Opposition of what I have said previously in the House. He can scour every transcript, and I will make them available, of every interview that I gave during that election campaign and he will find no such commitment,” the Prime Minister said.

The ACT Chief Minister Jon Stanhope said that following the hike, home loan interest will consume more of the average Canberra resident’s pay packet than at any time since 1991.
Analysis conducted by ACT Treasury revealed that the interest payments on the average home loan had now reached 30.7 per cent of average weekly earnings.

“Since the last election in which the Prime Minister promised to keep interest rates low, the average Canberra household has had to find an extra $94 per week just to meet the interest cost on their mortgage,” he said.