Monday, October 15, 2007

Trust. Why there's none on interest rates.

What a difference three years makes. Announcing the last election in 2004 John Howard asked “who do you trust to keep interest rates low?”

The “first and most sensitive” threat to the living standards of Australian families from Labor was higher interest rates.

Three years on and five interest rate hikes later (six if you have copped an extra increase from your lender as a result of global financial markets crisis) there was not a word in the Prime Minister’s announcement about interest rates. And not a word about trust either.

When the Prime Minister stood at a lectern that read “Keeping interest rates low” Australia’s standard bank variable mortgage rate stood at 6.82 per cent. It’s now 8.07 per cent, and certain to climb higher - quite possibly during the election campaign itself...

It costs $380 a month more to pay off $400,000 mortgage than it did at the time of the last election. After the Reserve Bank governor Glenn Stevens and his board have pushed up rates again it’ll cost an extra $70 more. And financial markets expect it to push them up again after that.

It isn’t happening because Australia is being swept along by an international tide, as the Prime Minister might want you to imagine. Australian interest rates are higher than those of any western country other than New Zealand. And they are being pushed higher still at a time when other countries’ interest rates are sliding.

It’s happening in part because of the actions of this government - the one that three years ago asked us to trust it to “keep interest rates at record lows.”

At a time when Australia is being flooded with foreign income on a scale not experienced since the Korean war and inflation is climbing toward the top of the Reserve Bank’s target band our government has been stoking the fires with $21 billion of tax cuts and spending announcements accumulating at the rate of $60 million a day.

And that’s before the avalanche of promises that it has saved up for the campaign and has ready to go.

By choosing an election date just two weeks and a few days after the Reserve Bank’s November board meeting the Prime Minister is as good as declaring that he expects it to wait rather than increase rates.

It’s a big ask.

People who know Governor Glenn Stevens from his time as the Deputy Governor and head of Economic Analysis within the Bank describe him as a “hard man” when it comes to rates – harder than his predecessors.

He has made it clear to the Parliament’s economics committee that if the next inflation figures, due out on Wednesday week October 24 necessitate a further hike in November he won’t hesitate on account of the campaign.

As he put it: “If it is clear that something needs to be done, I don’t know what explanation we could offer the Australian public for not doing it - regardless of when an election might be due”.

Indicating that as far as he was concerned the board’s decision would depend totally on the October 24 inflation figures he said “should the inflation data or other data make that case, I feel we have no choice - nor should we have any choice.”

Glenn Stevens was promoted to the top job in the Reserve by the Treasurer Peter Costello, but it would be wrong to believe he feel he owes any loyalty to Mr Costello or the Coalition.

Senior firgures in the Bank, most probably including Stevens, were seething during the last campaign at the way in which Coalition misused the Bank’s name to add authority to the unprovable and essentially worthless claim that interest rates would always be lower under the Coalition than under Labor.

In fact, as the outgoing Reserve Bank Governor Ian Macfarlane confirmed in a radio interview with Maxine McKew last year, professional interest rates (but not mortgage rates) peaked under the Coalition in 1982.

“Depending on how you measure it, you can actually get figures as high, for a few days, as 25 per cent,” he said. John Howard was Australia’s Treasurer at the time.

The Labor Party had neither the wit nor the courage to argue the case. Macfarlane knew the truth but bit his tongue.

As he told McKew, “there was no way that I could speak out without effectively becoming a third force in the election, and that would not have been in the long term interests of the Reserve Bank or Australian monetary policy at all.”

The Bank wrote private letters of complaint to both the Liberal Party and the Australian Electoral Commission, which it has since made public.

Stevens and the Bank owe the Coalition little. Should Australia’s rate of inflation turn out to be high Wednesday week, they’ll return it in spades.