The Guardian 12 March, 2008
Why the pursuit of higher interest rates?
Anna Pha
Up go the mortgages, up go the credit card payments yet again. The Reserve Bank last week lifted the official cash rate from 7 percent to 7.25 percent. It came as no surprise that the banks immediately put up their loan rates. Reserve Bank Governor Glenn Stevens said that a rate of 7.25 percent was "needed to secure an inflation rate of 2 to 3 percent over time".
The latest rise comes before the impact of recent increases could possibly be assessed. There is a considerable lag in time as the impact spreads through the economy and the flow-ons occur. Why not wait before acting again?
When the Reserve Bank in the late 1980s kept raising interest rates with no signs of the "runaway economy" slowing, they reached 18.2 percent before Labor Treasurer Paul Keating heard "an audible snap".
The use of interest rates is a very crude instrument with which to direct economic developments and attempt to curb inflation and control the growth of the economy.
Back in 1990, then Reserve Bank Governor Bernie Fraser made the point after reducing interest rates: "Monetary policy on its own cannot rectify Australia’s difficult economic problems but today’s reduction in interest rates should provide some relief to viable businesses and encourage investment opportunities, without risking the hard-won gains on inflation."
Fraser’s point is all the more true when looked at in present conditions, where interest rate increases will not affect some of the principal factors behind inflationary pressures such as the drought (fruit and vegetable prices), housing shortages, petrol prices and the boom in overseas demand for Australia’s resources. Higher interest rates will exacerbate other sources of inflationary pressure such as increasing the cost of housing (rental and mortgage repayments), credit card debts, and the costs for businesses servicing their borrowings.
Recession
The economy is running close to capacity, and private business investment is on the rise, attracted by unmet demand. But the interest rate increases will curb domestic demand (the amount workers can purchase with their wages), at some point families attempting to make crippling home loan and credit card repayments or pay exorbitant rent will be forced to cut their spending and seriously reduce demand as supply is expanding.
These are the ingredients of a classical capitalist economic cycle heading towards the end of a boom into recession. But there are many difference to the 1980s.
By the time the indicators are clear that the economy is heading into recession, it will be too late to stop the downward spiral as more recent interest rates rises will still be taking their toll.
Household debt is far larger and unsustainable today, particularly if wages and welfare payments are not increased. The structure of investment capital has undergone a transformation, with around $1 trillion in workers’ retirement savings — superannuation and other managed funds.
The steady and large inflow of savings into these funds has provided the financial sector with buckets of money to invest. This is one of the factors behind the highly inflated stock market and availability of capital for private equity and the privatisation of state assets.
Government assets have been seriously depleted by privatisation. Financial and other deregulation along with privatisation have seen governments hand over many of their responsibilities and control of economic levers to transnational corporations, thus leaving them in an extremely weak and relatively powerless position to deal with crises or look after people’s needs.
The funds of privatised banks — including the Commonwealth Bank — are not guaranteed by government, which they were under state ownership. Governments lament the actions of the Commonwealth Bank, for example, when it not only passes on the Reserve Bank rate rises, but also raises its own interest rates. That is on top of mushrooming fees that amount to theft of people’s money.
In all of the writings of economic commentators the threat of inflation is highlighted and usually support is given to the interest rate hikes. This time no one is blaming high wage rises for the inflationary pressures — wages have been held down under WorkChoices. The old myth that wage rises cause inflation is, however, still lurking in the wings, waiting to be brought out if any unions look like winning real increases.
Monopoly pricing
One of the most important causes of price inflation is the practice of monopoly pricing by the largest corporations. They collude and make the most of their monopoly of markets to keep prices artificially high. How else could petrol and interest rates move in such unison across the market? How else would imported goods produced in slave labour conditions overseas carry similar price tags to those made in Australia?
Under WorkChoices these transnationals have been able to drive up the rate of exploitation, pay workers less to do more work, and instead of reducing prices because the goods have cost less, they charge even higher prices. As a result people cannot buy as much unless they borrow.
So far recession has been staved off by the use of debt — but that cannot last forever. Every increase in interest rates makes its more difficult for families, farmers and small businesses. And when they do drown in the financial mire, the banks step in, sell their homes, farms and businesses over their heads, and somehow come out ahead yet again. These forced sales give the larger sharks a chance to snap up bargains and increase their monopoly control.
If higher interest rates were just about cooling the economy, then what better means than strict, enforced competition laws and price controls. No, the rate rises are there to ensure that it is working people and their families who carry the can for the excesses of capitalist greed.
Massive hike
Interest repayments have risen by 57.8% since 2002.
Small incremental increases have seen the official rate increase from 4.5% to 7.25% since May 2002. For example, interest repayments on a $100,000 debt have risen from $4,500 to $7,250. That is an increase of $2,750. In percentage terms, $2,750 is 57.8% of $4,500. That is, the increase in interest is of the order of a whopping 57.8%. It is NOT an increase of 2.75% (7.25-4.5=2.75) as some might suggest.