Wednesday, February 06, 2008

Rudd: For now, we can't prevent more rate hikes

Australia’s Reserve Bank has signaled that it will continue to increase interest rates until it hurts enough to dent inflation in an aggressive statement defending its latest rate hike – its third in six months.

The 0.25 per cent increase, due to take effect this morning, will lift Australia’s money market cash rate to 7 per cent - about the highest in the western world.

The standard variable mortgage rate will climb to 9 per cent, also one of the highest in the world and the highest for twelve years.

The increase will add a further $68 a month to the cost of servicing a $400,000 mortgage on top of the increase of around $50 imposed by the banks themselves when they widened margins last month.

Taken together the Reserve Bank’s three hikes along with the bank’s wider margins have added $237 to the monthly cost of repaying such a mortgage since August.

A further hike of the kind now contemplated by the Reserve would add another $68 a month...

In its statement the Bank said that it wanted a “significant slowing” of the
economy in order get inflation back under control and that it would continue
to evaluate whether interest rates were “sufficiently restrictive”.

The Prime Minister Kevin Rudd held out no prospect that today’s rate hike
would be the last saying that inflation would “take a long time to get back
under control”.

“I am being blunt with you. The problem took a long time to build, it will
take a long time to turn around. If you read the Governor’s statement
carefully you will see that inflationary pressures are still on the build.
I don’t intend to guild the lily on that, they are on the build,” he said.

The Reserve Bank statement said that despite an expected slowdown in global
economic growth it expected Australia’s terms of trade to climb higher
putting further pressure on inflation.

It expressed concern about what it said were reports of high capacity usage
and shortages of suitable labour.

Kevin Rudd used the opportunity to attack the Coalition saying that until
November it ran a “government of short-termism, as demonstrated by no action
on skills, no action on infrastructure.”

“They seemed to think that these ideas were interesting exercises in social
policy or what happened out in the regions. Our predecessors didn’t quite
grasp that these were core elements in the overall fight against inflation,”
he said.

“The Reserve Bank is not made up of a bunch of pussy cats who sit there and
make the odd sort of fleeting observation about a few skills here and a bit
of infrastructure there. If in 20 warnings over a three-year period they
are saying to government - will you please pay attention to this because it’
s building inflationary pressure in the economy, you would have thought
someone would have done something.”

The Prime Minister said that the tax cuts promised during the election would
be delivered but held out the prospect of greater cuts in government
spending than have already been signaled.

“The Budget Committee has been meeting in long session, line by line,
program by program, item by item. This is a very tough business. I
understand the Finance Minister may have more to say about this,” he said.

The Finance Minister Lindsay Tanner is booked to speak at the National Press
Club today.

Asked whether politicians should show restraint by accepting a lower pay
rise level than that suggested by the Remuneration Tribunal he replied that
he had an open mind on the question.

“It depends how this year starts to unfold. But restraint is restraint and
we’ll have something further to say about that.”