The Guardian 13 February, 2008
Up go interest rates...again!
Anna Pha
With its eyes focused on the US financial crisis and predictions that inflation will continue to rise, the Reserve Bank of Australia (RBA) last week announced yet another hike in interest rates. This was despite warnings that up to 300,000 homeowners could be at risk of losing their homes if interest rates rose again and the fears some economists have expressed that higher interest rates could bring on a "hard landing". The RBA increased the official rate by 0.02 percent to seven percent. The Bank’s action is in sharp contrast to that of the Federal Reserve in the US which, in an attempt to stave off recession, has yet again cut interest rates.
"Recent information points to significant inflation pressures," stated the Reserve Bank, announcing its latest increase.
So what are these inflationary pressures? The RBA refers to industry operating at high capacity usage, shortages of suitable labour, and high demand. The underlying inflation rate as measured by the Consumer Price Index (CPI) is estimated to be 3.6 percent, outside of the Bank’s target of 2-3 percent, and likely to go higher, according to the RBA.
The three principal sources of price rises in the CPI index are rent, financial services and transport. Home mortgage payments are not included in the calculation of the CPI index.
So how will the Reserve Bank’s higher interest rate serve to curb these price rises, and so reduce the rate at which prices are rising? It will do neither. In fact, it adds inflationary pressures of its own.
Landlords keep raising rents in line with interest rates, and this has been compounded by increases in land taxes.
Corporate profits are booming and prices are rising. Those on higher incomes have never had it so good. But these profits have come at the expense of low and middle-income workers and their families. The gap continues to widen, with a growing percentage of the workforce increasingly dependent on credit.
Housing shortages have pushed up the price of housing in some states despite previous increases in interest rates. Governments have slashed spending on public housing and privatised much of existing stock.
Every interest rate rise adds to the cost of credit. It pushes up home mortgage, car loan, credit card and other debt repayments. The situation has been worsened by a number of leading banks adding an additional interest rate increase (over and above those of the Reserve Bank) of between 0.01 and 0.2 percent in January and some are now raising rates by more than the Reserve Bank’s latest 0.25 percent.
It is all very well for Labor Treasurer Wayne Swan to berate the Commonwealth Bank (CBA) for increasing rates by more than the Reserve Bank. It was Labor that privatised the CBA in the 1980s. If the CBA were still publicly owned, the government could be using it to reduce interest rates and the other banks would be forced to do likewise.
The banks are simply trying to recuperate some of the losses that they have suffered on the crisis-ridden US mortgage and other markets from out of the pockets of working Australians.
The higher interest rates will push up costs to businesses and across the economy. Those that are in a position to do so will increase prices to cover their higher interest payments.
Apart from higher interest rates, banks are forever introducing new fees and raising existing ones. It is not surprising that banks are rolling in record high profits.
The rise in transport costs is largely due to record high petrol prices, which have a flow-through effect to the rest of the economy. Neither state nor federal governments have the political will to take on the petrol companies and bring prices down.
In raising interest rates further the Reserve Bank is attempting to cool what it describes as a booming economy. It seeks to curb consumer demand in the hope that the rate of rising prices will be reduced.
This policy approach places the burden on the backs of ordinary working Australians and their families, and as outlined above it fails to address the three principal areas of price rises.
Recent reports indicate that as many as 750,000 Australians could be affected by "mortgage stress" this year if interest rates go much higher, and as many as 300,000 lose their homes.
Pushing families to the wall with interest rate rises is not the only means of cooling the economy.
There are other, far more effective, ways of cooling the economy and inflationary pressures such as imposing price controls, nationalising banks and oil companies, fixing interest rates, expanding public housing and reversing the economic deregulation that has made the economy so vulnerable to international crises. This would curb the profits of the big oil companies and financial conglomerates and be of untold benefit to the economic security of working families.