Interest rates up again

Nurses feel the sting with escalating interest rates and petrol prices

During the 2004 federal election campaign, John Howard promised to ‘keep interest rates at record lows’ and he asked: ‘Who do you better trust to keep your interest rates low?’

Voters’ belief that Howard represented a lower interest rate risk than Labor may have been crucial in deciding the outcome of the 2004 election.

This is despite the fact that when Howard was the Liberal government’s treasurer in 1982, interest rates hit a frightening 21%.

Last month, interest rates rose for the third time since that election. Howard quickly blamed the rise on temporary factors out of his control, such as high prices for oil and the cyclone-affected banana crop.

Was Howard’s 2004 promise a lie? Did he lie again last month about the cause of higher interest rates? Will voters trust him again?

There is no doubt Howard has broken his 2004 promise. Home loan interest rates are now at their highest since early 2001 and there is an excellent chance of another rise later this year.

At the same time, family budgets have been hit by huge petrol price increases as well as price rises in food, childcare and health services.

‘If you are mortgaged to the gunnels and already have shed non-essentials just to keep the car going, you’ll be reluctant to rate John Howard highly as a promise keeper,’ concluded The Daily Telegraph’s chief political correspondent, Malcolm Farr.

So why did interest rates go up? Do we accept Howard’s argument that it’s all the fault of world oil prices or Cyclone Larry or wiping out Queensland’s bananas?

Interest rate movements are decided by the Reserve Bank. It puts rates up when it wants to depress the level of demand in the economy so as to keep inflation (the rate of price increases) in check.

When the bank raised rates last month the Consumer Price Index showed inflation running at an annual rate of 4%.

That was the highest rate of price increases in 11 years if the one-off effect of the GST’s introduction (another Howard broken promise) is excluded.

The Reserve Bank explained that its decision was ‘based on the gradual increase in underlying inflation this year’ and not on ‘temporary factors’ like petrol and fruit.

As The Sydney Morning Herald’s economics commentator Ross Gittins put it: ‘Don’t fall for John Howard’s excuse that no government can stop cyclones or control the world oil price. He’s just trying to divert attention from a promise a more scrupulous politician would not have made – to “keep interest rates low”.’

In fact, the Reserve Bank had been warning for months that strong consumer spending was pushing up demand and prices and therefore posed an interest rate risk.

Yet the Howard team – who like to pose as competent economic managers – ignored these warnings and went ahead with generous tax cuts for high-income earners in their last Budget.

Those tax cuts were worth $138.46 a week for someone on $200,000 a year. A worker on $50,000 had to make do with a cut worth only $9.81 a week. Deduct the two interest rate rises since the May Budget (costing $29.49 a week on a $400,000 mortgage) and that worker is now $14.95 a week worse off – even before petrol and food prices are factored in.

Howard denied the tax cuts helped push up interest rates.

But the Reserve Bank contradicted him by confirming the tax cuts were a factor in its decision.

Two days after putting up rates, the bank said: ‘The tax cuts that came into effect in July, coupled with growing employment, will boost household incomes and should add to spending in the second half of the year.’

This was a rare case of the bank repudiating a Prime Minister. Chris Richardson of Access Economics called it ‘the equivalent of a central banker taking off his shoe and slamming it on the table’.

The bank may also have been warning the government of the likely interest rate consequences of more tax handouts in next year’s Budget.