Tuesday, December 01, 2009

A third interest rate hike. Let's be honest about why.

Tony Abbot didn't get off to a good start on today's rate hike.  There's time.

The new Opposition Leader is a Rhodes Scholar with a degree in economics.

But he seems to be spectacularly ill-informed about the forces pushing up interest rates.

According to Tony Abbot at his first press conference as leader today "each and every interest rate rise over the next 12 months is due to the irresponsible spending spree of the Rudd government.''

That's what he thinks.

And who would dare argue with him? Apart from the Reserve Bank board...

Here's what it said at the bottom of the statement that accompanied today's third successive rate hike:

"With the risk of serious economic contraction in Australia having passed, the Board has moved at recent meetings to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker."

The Board says its' pushing up rates because the risk of a recession has passed.

The need for exceptionally low interest rates has passed.

We know they are exceptionally low because they are far lower than any of the rates on the graph as a prop used by Tony Abbott's former leader John Howard during the last election campaign.

Entitled "The Facts: Home loan interest rates are lower under the Coalition," it shows rates under both of the previous governments far higher than has ever been the case since the collapse of Lehman Brothers and the onset of the global financial crisis late last year.

Rates were brought down to deal with the crisis. The crisis has passed. So they're moving back towards where they were. According to the Bank it's as simple as that.


It is concerned about the sustainability of Australia's return to economic health.

In Reserve Bank language:

"These material adjustments to the stance of monetary policy will, in the Board’s view, work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead."

In everyday language we can't keep rates where they were because it would encourage speculation and a price and an upward price and wage spiral that would end in recession.

Perhaps it should have used everyday language.

Perhaps Tony Abbott has been (understandably) preoccupied.

But the Bank hasn't pushed up rates because of the " irresponsible spending spree of the Rudd government".

Except to the extent that spending spree helped us escape the crisis.

Published in today's BusinessDay.com and National Times

See also: Michael Pascoe - Abbott's first big lie: interest rates

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