EDITORIAL: by Peter WestmoreNews Weekly
Are we in for another interest rate hike?
, February 3, 2007
Another interest rate rise would hit families, small business and farmers.At the time of going to press, the December quarter Consumer Price Index (CPI) figures are due to be released. The CPI figures are expected to have a decisive influence on whether the Reserve Bank lifts official interest rates at its meeting on February 6.
Over the past 15 years or so, the Federal Treasury has abandoned most of the economic levers used previously to control inflation: virtually the sole remaining instrument is the official interest rate level which then sets the benchmark for banks and other lenders to apply across the economy.
The theory is that if the annual inflation rate is too high - which the Reserve Bank has said is above 3 per cent - it will slow the economy by forcing businesses and consumers to pay higher interest rates.
Last year, the Reserve Bank lifted interest rates three times, in an effort to slow the property boom, a principal cause of rising inflation.
The limitations of this means of controlling inflation were shown last year, when rising interest rates had little effect on soaring house prices, particularly in Western Australia and Queensland, whose economies are directly influenced by the resources boom, particularly rising prices for coal, iron ore and other commodities.Threshold
Most economists expect that the inflation rate for the December quarter will rise by at least 0.6 per cent, pushing the annual rate above the threshold level of 3 per cent which Reserve Bank Governor, Glenn Stevens, last November warned could trigger a further interest rate rise.
Such a rate increase, the fourth in a year, would seriously undermine confidence in the economy, and damage the Federal Government's economic credentials.
Further, it would adversely impact on those parts of the economy which have been worst affected by the growing power of large corporations, particularly small business and the rural sector.
Small businesses, which often operate on an overdraft, are caught in a cost-price squeeze of rising prices and lower incomes. Duncan Ironmonger, economic consultant to D&B, said that a recent business expectations survey showed that more than half of all businesses expect to raise prices in the current quarter, and nearly 40 per cent expect profits in the current quarter to be lower than a year ago, the worst result since the 1991 recession.
Most small retailers, he said, were "having a really tough time".
Much of rural Australia is suffering from the continued effects of drought, low agricultural commodity prices, and the effects of limited access to international markets as a result of the protectionist policies of Australia's major competitors, the United States and the European Union.
Contrary to recent media stories, the heavy rains which fell across much of rural Australia have done little to relieve the financial crisis affecting the countryside. For many, the rains fell too late, after farmers had de-stocked their properties because of the drought: for others, the benefits of the rain will only appear when the next crop is sold, and that will not occur until the end of 2007, at the earliest.
Any increase in interest rates will hit them hard.
At the same time, an increase in interest rates will have comparatively little effect on the corporate sector, because corporate profitability is at historically high levels, and many are able to borrow from abroad at lower interest rates.
For home-buyers, however, a further quarter per cent rise in interest rates will push rates to their highest level in over 10 years. It will increase repayments, on an average mortgage of $250,000, by about $2,000 a year.
The inevitable effect will be to increase pressure for mothers with young children to return to the paid workforce, or for families to defer having children.
While single-income families are in difficulties, the situation in the home-building industry as a whole is ambiguous. The Australian Bureau of Statistics' housing finance report for November 2006, released in mid-January, showed that both the number of home loans taken out in November, and their value, fell compared to the previous month. The fall was around one per cent.
However, building approvals in November jumped dramatically, by 4.1 per cent in numbers, and 1.4 per cent in value. This indicates that investors continue to put money into the housing market, even if home-owners are feeling the squeeze.
The blunt instruments currently used to manage the economy are creating real hardship for small business, farmers and families.
Under current policy, the social consequences of economic decisions are almost entirely ignored by both the Treasury and the Reserve Bank. In the past, these effects were moderated by the actions of bodies such as the Commonwealth Development Bank and the Primary Industry Bank, and concessional interest rates for home-owners. None of these currently exists.
With a resurgent Opposition in an election year, the Federal Government may pay the price for pursuing an economic agenda while ignoring its effects on the most vulnerable people in our community.- Peter Westmore is national president of the National Civic Council.