The signs are a rate rise is on the way. In the March quarter the headline rate was 2.9 percent with the all groups CPI rising 0.9 percent following a 0.5 percent rise the previous quarter. Hikes in the price of pharmaceuticals, vegetables, electricity and fuel were the main reasons for the March quarter increase. The Board said CPI inflation was expected to rise to 3 per cent in the June quarter figures partly due to higher taxes on tobacco. “The important question for the Board at its next meeting would be whether the new information materially changed the medium-term outlook for inflation,” they said.Several senior Government will be anxious smoking a few coffin nails while waiting for the CPI headline figure on Wednesday. The RBA have held interest rates at 4.5 percent for two months – still very low by Australian standards, but even a 0.25 percent rise is a bad look in the middle of a tight election campaign. In doorstops Opposition leader Tony Abbott has been hammering home the point of “upward pressure on interest rates” and while he blames government borrowing rather than new excises, an August rate rise would play into his campaign themes.
The cash rate has gone up seven times in the past year but this was after a historical low of 3.0 percent during the height of the Global Financial Crisis in 2009. Rates are still 2 percent lower than when Labor took office in November 2007 and also slightly lower than most of the period between 2001-2005 when the Howard Government dined out on the “low interest rates” they said their policies were responsible for.
Their promises were exposed as fiction as rates rose prior to the last election and they continued to rise when Labor took power. Playing politics with interest rates ignores the fact the Reserve Bank Board is independent of Government control. In Sydney today Glenn Stevens reminded his audience the Board decision would not be swayed by the election campaign. He also said the CPI figure would not be the only decision factor. As today’s board minutes noted, the health of the European banking sector has a significant impact on financial markets and global confidence which could lead to an “updated reading on domestic prices”.
Neither major party likes to draw attention to this fact because it shows how little control Governments have over the wider economy. Ken Henry (an RBA board member) and the Treasury did a terrific job to keep Australia out of recession during the GFC but the economy and the interest rate was not immune from its devastating impacts. Rising interest rates means the economy is in good shape. Politicians and the media should be reminded of that fact whenever they play games with rate rises. Lower interest rates means either the China boom has ended or the European sovereign debt crisis has spiralled out of control. Either way, a $40 a month saving on the monthly mortgage won’t mean much if there is no job to pay for it. The media needs to tell this story fully instead of falling for phony political lines about “upward pressure”.