Tuesday, August 07, 2007

Truth in advertising. Who are you going to believe - the Liberal Party or the Governor of the Reserve Bank?

The Coalition’s attempt to pin the next interest rate rise on Labor party state premiers suffered a setback yesterday when Labor’s Kevin Rudd used to words of the Reserve Bank Governor to discount it.

Governor Glenn Stevens and his board will meet today to decide whether to push up rates. The Bank will announce the decision at 9.30am tomorrow.

A Coalition online advertisement due for broadcast this week says that over five years “Kevin Rudd’s Labor premiers” will borrow $70 billion and “plunge Australians into debt”.

It adds: “never forget, it is governments who borrow money and get into debt who put upward pressure on interest rates”...

The Labor leader yesterday used Governor Stevens words in the premiers’ defence.

On February 7 this year in his first appearance before a parliamentary committee as Governor Mr Stevens was asked whether he had any concerns about the extra borrowing state governments had planned to build up infrastructure.

He replied that he thought by and large those projects were needed.

“I think it is apparent in a number of areas that infrastructure, like anything else in
the economy, needs investment,” the Governor said .

He added: “I do not think the problem here is finding the money. Balance sheets of
governments in this country, by and large, are in very good shape. They will not have any
trouble borrowing money from the lenders of the world for a reasonable project”.

The implication of the Governor’s answer was that he did not believe that by borrowing money Australia’s state Labor governments would be putting upward pressure on Australian interest rates, as the Coalition advertisements claim.

However, in an answer which was not fully quoted by the Labor leader the Governor did indicate that new state government infrastructure projects could put upward pressure on inflation and therefore interest rates by competing for workers and resources with other projects.

The Governor said: “I do not think it will feed directly into the consumer price index per se, but all of this stuff is part of the picture for demand in the economy that makes up the overall forces that we are trying to assess. It is hard to complete these projects. I am not saying they should not be done, but it will be difficult.”

The Reserve Bank’s decision today is likely to be more prosaic. The so-called core measure of inflation in which it places the most trust is climbing towards the top of its comfort zone. That measure, compiled by the Bureau of Statistics from prices surveyed in and before June may be out of date. A more recent measure compiled by the Melbourne Institute from prices measured in July suggests that core inflation has since moved beyond the bank’s target zone.

Financial markets believe that the kick up inflation will force the bank to act tomorrow, pushing up its cash rate by another 0.25 per cent to 6.50 per cent, its highest level in a decade.