Kevin Rudd does not want to own these rate increases
UPDATE: As of 5pm all four banks have already passed on the interest rate increase.
For the second time in as many years, the Reserve Bank has helped cement the banking community’s reputation as a cuddly bunch of warm-hearted funsters by using Melbourne Cup Day to stick it to home-owners.
While you were munching on some prawns the RBA increased rates from 3.25 per cent to 3.5 per cent, resisting the temptation to go for a much more dramatic and painful 0.5 per cent rise, but still sticking by its warning that there would be more more pain to come.
Many people with mortgages will shrug this one off – we’re still about $700 a month better off in terms of repayments than we were when the GFC hit.
But the rate that stopped the nation will be felt most acutely by working-class and middle-class families in Sydney and Melbourne with inflated mortgages, and young first home-buyers around the nation who borrowed in the past 12 months when rates were at an historic low.
There will be a fierce debate as to whether the RBA needs to opt for another hike before Christmas, especially when all the inflationary targets are at what the Bank itself regards as the lower end of the spectrum.
And if the RBA argues that it needs to use the blunt interest of a rate increase to take the heat out of the Sydney property market – by clobbering home-owners again, as it did with its ill-conceived rate hike in the first quarter of 2008 – it may again find itself the focus of suburban rage in our biggest city.
As an aside, there’s a whole separate argument to be had here about the near-criminal failure of the NSW Government to release enough land to help reduce home prices in the Sydney basin by simply enabling the construction of more homes.
But the most interesting and immediate results from today’s rates increase will be a political one.
Firstly, if it looks like rates will continue to rise and rise into next year, Kevin Rudd will be tempted to call an election sooner rather than later, say in March or April, rather than face the political hell which confronted John Howard in 2007 when he found himself campaigning in the middle of the sixth rate hike at the very end of his three-year term.
Secondly, it will give new energy to the Opposition, buoyed as it obviously is from yesterday’s seven-point turnaround in Newspoll, as it argues that the rate increases are the result of Kevin Rudd and Wayne Swan’s profligacy with money. Whether it’s true or not, and setting aside Labor’s argument that the economy would have totally nose-dived without stimulus spending, Malcolm Turnbull and Joe Hockey will be out there saying that it’s Labor’s fault because they’ve blown the surplus, jacked up the deficit, and lumbered the nation with inter-generational debt.
There are things you want to own as politicians. Interest rate increases are obviously not among them.
It’s worth recapping the shambles which John Howard was in ahead of losing both the election and his seat to Labor almost exactly two years ago. Front-page headlines such as that featured above gave John Howard full personal ownership of these rate hikes. When he clumsily said sorry when rates jumped at the end of the campaign - and then retracted his apology, saying he only meant he was always sorry if rates rose - he inadvertently drew attention to the fact that it had become his problem.
Howard does not believe that he would have won the 2007 election if the Reserve Bank had not increased interest rates in the middle of the election campaign. But he has wondered aloud whether he and some other Liberals in marginal seats might have been able to hold on if the RBA had not acted with such audacity in green-lighting a mid-campaign rate increase which, at worst, nuked their claim to superior economic management, and at the very least provided a massive distraction which kept them off message in the final days ahead of the poll.
But if John Howard isn’t maintaining the rage, there are plenty of other Liberals who have never forgiven Reserve Bank Governor Glenn Stevens for taking the unprecedented decision to jack up the official cash rate in the heat of an election campaign, for what was the sixth successive rate rise since the 2004 poll.
Stevens is openly derided by some conservatives for continuing to slam the brakes on the economy at a time when - with some revisionism as to the extent of their public statements - there were fears on the Coalition side that the global economy was about to tank, meaning that rates should have remained static or even been cut.
Whatever the case – in the middle of the 2007 campaign, the sixth successive rate hike turned into a political nightmare for a party that had long traded on its economic credentials, and even framed its entire 2004 victory over the Mark Latham-led ALP around the cocky “who do you trust on interest rates?” slogan.
That slogan – which the RBA hated – offended the usual sense of distance between the government and the Central Bank.
The government of the day is always determined to stress the independence of the Reserve Bank, to point to the arms length-relationship between its own stewardship of the economy and the Central Bank’s management of monetary policy.
But the two functions are so obviously intertwined – and in the minds of home-owners pretty much interchangeable – so much so that the voting public regards the cost of its mortgage as the most telling report card on government performance.
And as John Howard found out, while you can get away with taking the credit for low interest rates in the good times, the voters will make you own high interest rates in the tough times.
The Rudd Government does not need to panic, at least not yet. It will take some cover from Governor Stevens declaration just now that “economic conditions in Australia have been stronger than expected and measures of confidence have recovered”. It will also try to argue, as Wayne Swan did this morning, that the stimulus will be tapering off into next year, so as to avoid accusations that they’ve been reckless in their spending.
But it appears that the Libs have succeeded in establishing this as a valid debating point, and an issue in the public’s mind. Combined with a couple of other uncontrollable factors – such as a procession of boats carrying asylum seekers towards our shores, to whom we’re simultaneously showing toughness and fairness, if you can work that out – Labor might find that today’s Newspoll wasn’t an aberration, but the start of something much more alarming.
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