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RBA increases interest rates « Previous | |Next »
November 7, 2007

It is as expected. The Reserve Bank of Australia increased the cash rate by 25 basis points to 6.75 per cent. It's tone is hawkish:

Inflation in Australia has increased. Underlying inflation was 0.9 per cent in the September quarter and close to 3 per cent over the past year...The world economy is still expected to grow at an above-average pace, however, led by strong growth in China and other parts of Asia. High global commodity prices remain an important source of stimulus to Australian spending and activity.In Australia, the tightening in credit conditions resulting from the global turmoil has been less pronounced than elsewhere. Wholesale funding costs have risen a little compared with official rates, and some borrowers have experienced an increase in interest costs as a result, but the flow of credit to sound borrowers does not appear to have been impaired.

So much for those who argued that an increase was not needed because of a recession in the US, due to a fallout in the subprime mortgage market. If that does not mean big political pain for the Howard government, then it places them on the political back foot.

| Posted by Gary Sauer-Thompson at 10:01 AM | | Comments (9)


we can now expect Peter Costello to come out and perform his job: explain that everything is going very well (economy booming) and 'that's because of us'. And, if everything is not going well---referring to the interest rate increase--then 'it's not our fault'.

It will be like watching a pantomine.

yep the campaign slogan, 'Go for Growth', looks a bit tacky now that it is the economy's rapid growth that's making the Reserve so nervous about inflation. It's objective is clear: to slow the rate of growth and thereby ease inflationary pressures.

So what will happen to the Liberals 'Go for Growth' campaign slogan now? Will the mainstream media see the contradiction between fiscal (tax cuts) and monetary (interest rates) policy?

Caroline Overington says over at the Australian:

Interest rates rose today..It is very good news for John Howard...That’s very good news for Howard. He’s just not allowed to say so.

Apparently, we trust Howard and his team, including Treasurer Peter Costello to “manage” the economy, and we feel this way, even if we don’t really understand what it means, to “manage” an economy.

This is from the woman who intelligently about the wheat board scandal. Maybe its ironic.


When they say Going For Growth could they have meant growth in interest rates?

I guess they could try to combat this by warning the banks not to rip customers off. It could be a good time to propose some kind of investigation into fees or something. Although if the faithful at the GG are any indication, they're sticking with the economic management mantra.

it looks as if interest rates are going to go higher as the commercial banks are expected to lift their margins on mortgages once the election campaign is over.I noticed that when Howard said sorry he was standing in front of a flag background, with the usual "go for growth" poster pushed to the sides. Sensible since the pace of economic activity must be slowed.

Where to now then, when the RBA says that growth in aggregate demand will need to moderate if inflation is to be kept to 2 to 3 per cent in the medium term. The RBA clearly flagged a third rise ahead, even knowing that the commercial banks themselves are planning to lift their margins.

Macquarie Bank economist Rory Robertson puts the situation well in his commentary on the interst rates.

The principal source of inflation, he says, is the "once in a century" boom in commodity prices, and the wealth it has created. But tax cuts also contribute by making demand higher than it would have been, and hence inflation, and hence interest rates.

To dampen demand and limit inflation pressures, the RBA has hiked rates in 2002, 2003, 2005, 2006 and 2007, from a low of 4.25 per cent to today's 6.75 per cent. Meanwhile, Canberra has cut taxes in 2003, 2004, 2005, 2006 and 2007.The election campaign has seen the Coalition and Labor both announce more tax cuts, to take effect in 2008, 2009 and 2010. The tax cut promises have been augmented with promises of heaps of new public spending.Fiscal policy and monetary policy look set to continue working in opposite directions.

I see that Rudd and Swan are saying that Labor's long-term policies would reduce short-term pressure on interest rates. Who are they trying to fool?

George Megalogenis puts it well: the Liberal campaign slogan has changed from 'Go for Growth' to 'Hang On and Hope.'

He says that the low-inflation jobs boom is well and truly behind us.Inflation is stirring. The Reserve Bank has been tightening monetary policy for five years.

they don't have a new campaign slogan nor a clear message.

They keep on saying that they are better then the Hawke Keating Government re interest rates, but the real issue is their flawed economic management--Costello has let the inflation genie out of the bottle, whilst Howard has done little to address the skill shortages and capacity constraints, which the RBA has warned them about for years.

I suspect that they both reckoned the RBA would not increase interest rates in November. Now Howard and Costello have to concede that strong economic growth has fuelled inflation and led to interest rate increases.


There was an alarming interview with economist Steve Keen on the 7.30 report last night about the contribution housing prices are making to inflation.

We seem to be in for a lot more pain regardless of who gets in.