Monday, February 04, 2008

Rudd: "The Bank will do what it has to do"

The Prime Minister Kevin Rudd has washed his hands of today's expected interest rate hike saying that there is nothing he can do or should do to prevent the Reserve Bank acting.

The Bank is considered certain to announce another hike - its third in six months and the eleventh in a row - at 2.30 this afternoon.

It will take the professional cash rate to 7 per cent for the first time since 1996 and the standard variable mortgage rate to 9 per cent.

When the standard rate was last at 9 per cent, in October 1996, the typical home loan was only half as big as it is today...

The increase will add a further $67 on to the monthly cost of servicing a $400,000 mortgage - $465 more than before the Reserve Bank began pushing rates up in 2002.

Speaking on The 7.30 Report late yesterday Mr Rudd offered support and understanding to the Bank saying that he wouldn't seek to direct it and describing inflation as the ultimate enemy of working families.

The Treasury Secretary Ken Henry is a member of the Reserve Bank board and will take part in this morning's vote in Sydney.

Mr Rudd said he wouldn't be directing Dr Henry to vote against the hike and nor would he be asking Dr Henry to speak against the hike.

“If you accept the independence of the Reserve Bank you don't go around trying to provide either public lectures or trying to convey some type of internal message,” he said.

“I believe the responsible course of action for the Secretary of the Treasury is to make sure that the Bank is completely familiar with where we are going in terms of the government's budget policy. They will then decide on a policy setting. Beyond that the deliberations of the board and what may or may not be said within the board are logically the province of the board.”

Signalling that he understood the need for the Bank to put up rates today Mr Rudd said that working families would suffer if inflation got out of control.

“Inflation is the ultimate enemy of working families. We have always said if we deal front and centre with inflation we are acting very responsibility in dealing with the challenges not just for the economy but for working families as well.”

Australia's underlying rate of inflation surged to 3.6 per cent in the year to December, well beyond the Reserve Bank's target band of 2 to 3 per cent and higher than it had been since Australia was last in recession in 1991.

A privately-calculated update released yesterday by TD Securities and the Melbourne Institute suggests that inflation kept climbing during January and is now running at an annual rate of 3.9 per cent.

In an effort to show that it was concerned about the impact of rising interest rates on home buyers the government chose yesterday to unveil the details of the tax concession it has promised to people saving for a deposit on a first home.

The Treasurer Mr Swan conceded that the scheme would do nothing to ease the stress faced by the one-third of Australian households already paying off mortgages.

“This is a scheme for people out there who battle to put away a modest deposit to get a toehold in what is a very difficult housing market,” he said.

“There are no silver bullets, no short-term solutions, but we’re using every arm of policy to put in place the policy that is needed in the long-term.”