The Guardian 15 November, 2006
Howard wriggles on interest rates
Bob Briton
"But the reason why interest rates went up last time and, if they go up tomorrow, the reason why they will have gone up, is because of the strength of the economy and the overheating from that strong economy which is causing some inflationary pressure."
That was Prime Minister John Howard on the eve of the Reserve Bank Board’s latest announcement on interest rates. Rates did go up last week — the eighth time since May 2002 and the fourth time since the last federal election. The election campaign was mostly fought out over Howard’s promise to Australians that his government would keep rates at record lows. A year later, the standard variable mortgage rate stands at 8.05 per cent and the cash rate at 6.25 per cent. This is higher than the rates have been for 10 years and higher than between July 1992 and October 1994 when Paul Keating was PM.
Howard used to say that low rates were a by-product of a sound economy; now surging rates are said to be a sign. Whatever cheerful spin the PM puts on the latest hike, it is unlikely to persuade homebuyers. The decision will soon add $33 a month to the repayments of home buyers with a modest $200,000 mortgage and $50 for those with $300,000 mortgages — up nearly $200 a month since the federal election.
"It could be the straw that breaks the camel’s back for many people out there with mortgages", NSW State Treasurer Michael Costa said. Many families who bought into ridiculously inflated housing markets in several Australian cities now cannot get out of their deepening debt trap by simply selling their homes.
The Sydney Morning Herald gave the example of the Chami family, who borrowed 100 per cent of the $450,000 price of their home in 2002. If they walked away and sold the home for its expected selling price of $380,000 today, they would still owe the bank $70,000.
Others hurting as a result of rising interest rates include part and wholly self-funding retirees. The inadequacy of the age pension has seen many retirees put their nest eggs into investments. The income from term deposits will go up modestly with the latest increases but returns on shares and property have been falling in the prevailing conditions of rising interest rates.
Howard claims that the rise in interest rates was necessary to keep inflation at bay. When it comes to the relationship between wages and inflation, the PM has again been arguing both sides against the middle. For some time he has been saying that industrial relations "reforms" and the increased use of AWAs have meant higher wages for Australian workers. Nobody but well-placed professionals would believe him. Now he has reverted to the "wage increases cause inflation" slogan he used in previous times. In the process, he has exposed the real reason behind his government’s WorkChoices assault and its precursor, the Workplace Relations Act — to slash the wages and conditions of workers.
"If we go back to a less flexible industrial relations system [i.e. one that would actually deliver better wages and conditions], the wage increases in the mining sector will flow through to other sectors of the economy and that will really blow the lid off wage inflation in this country", Howard said. Without saying as much, the PM acknowledges that the current economic breathing space being enjoyed by Australia is dependent on the sale of resources to genuinely booming economies like China and India.
Whatever the economic weather, Howard in office will say the sun is shining. Whatever problems the capitalist economy encounters, there will be one solution — to push down the share workers take from the wealth that they, themselves, have produced. If an interest rate rise will force working families out of the home they have bought to escape crippling rents; tough!