We don’t want to join the high interest rates club
Update 2.35pm: The RBA has just announced it has raised the official cash rate by 0.25 a per centage point to 3.25 per cent.
The Rudd Government is yet to make a hard decision. But this won’t stop them leaving the heavy lifting to someone else - namely Glenn Stevens at the Reserve Bank.
Whether the RBA decides to lift interest rates today or on Melbourne Cup day, this will be a hard decision. It will mean increased pressure on family budgets and small business.
For the more than 200,000 Australians who have bought their first home recently, it will their first Rudd rate rise, with more to follow.
It will also withdraw an important stimulus for the Australian economy, especially for our housing construction industry, following the wind back of the first home owners boost.
What amazes me is how the Rudd Government have been able to hypnotise so many into thinking that an increase in interest rates will be a good thing. It reminds of Obi-wan Kenobi’s Jeddi mind trick in the original Star Wars (I was nine at the time).
Sure, interest rates in Australia are low by domestic standards. But internationally, in the OECD, only Mexico, Iceland, Turkey and Poland have higher interest rates than ourselves. I’m don’t think this is the economic club we want to join.
Higher relative interest rates also inflate the value of the Aussie dollar, making our exports more expensive and damage our local tourism industry by making an overseas holiday much cheaper.
So why does the Rudd Government believe raising interest rates is such a fashionable idea? It’s not like it worked out so great last time they advocated this approach.
After they were elected in November 2007, they embarked on their first of many epic conflicts, the great war on inflation.
In pursuing this campaign they egged on the Reserve Bank with the Treasurer’s reckless talk of the inflation genie being out of the bottle. As a consequence rates were increased at the exact moment we needed them to ease. The same group think is now driving commentary on what should be done with interest rates today.
On that occasion, as now, the Rudd Government had a political strategy, not an economic strategy. After the election, talking up inflation was all about shamelessly trashing the economic reputation of the Howard Government. Today, their preference for higher interest rates is all about having an excuse to keep spending borrowed money and putting up signs outside schools, proclaiming their magnificence all the way until the next election.
There is an alternative. The Rudd Government can make a hard decision and pull back on their record spending. Their stimulus spending program is already behind schedule, with the bulk of the spending still ahead of us.
Sure, many people may like a new school hall, even if they didn’t ask for one. But if the choice is between that and paying higher interest rates (and it is, due to the relative strength of the Australian economy), then the response will be different. And that is the hard choice before the Rudd Government, to cut back on their record spending and ease the upward pressure on interest rates.
Lower interest rates will enable households to keep spending in our economy while keeping the cost of finance lower for small business, who are doing everything they can to keep people in work. It will also enable our exporters to be more competitive in an incredibly tough and price sensitive global marketplace. Building more school halls will not achieve these objectives.
The hard task for the Rudd Government is to get their spending under control. They must work through every line of expenditure, as the Coalition would if we were in Government today, and as we did to pay back $96 billion of Labor debt last time and return our budget to surplus.
Only the Government can identify these savings because, as a Government, only they have access all the information you need to make these decisions.
If they do this then Glenn Stevens and the RBA will have less pressure on them to raise interest rates and do the job the Rudd Government refuses to do.
So when interest rates rise and Kevin Rudd and Wayne Swan do their best Obi-Wan impersonation saying don’t look at us, we just run the country, you will know better.
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