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Rates to rise no matter who you elect
by David Uren, Economics correspondent
The Australian
August 31, 2004

INTEREST rates are set to increase no matter who wins government on October 9. The Reserve Bank, which fixes rates, has already said it would be "very surprised" if they don't.

Prime Minister John Howard yesterday advanced two arguments to support his proposition that interest rates would rise further under Labor than the Coalition.

He said Labor always ran big budget deficits, and would unwind the Government's employment relations reforms.

In a radio interview, Mr Howard claimed interest rates always rose under Labor.

"Over the past 30 years, every time we've had a Labor government, interest rates have gone through the roof because Labor governments always go into deficit," he said.

Labor leader Mark Latham was quick to hit back, saying this was simply not true.

"If you go back and look at the comparison between the Whitlam government and Fraser, when Mr Howard himself was the treasurer, that's just not true."

The chairman of Allen Consulting and an expert on budget policy, Dr Vince Fitzgerald, points out that budget deficits do not have a direct impact on the short-term interest rates set by the Reserve Bank, although they may influence long-term rates.

"Both sides of politics are very strongly committed to sound fiscal policy in the sense of running surpluses, or at the minimum, budgets that are balanced over the cycle," he said.

He noted that all the Labor state governments are as fiscally conservative as their opponents would be in office.

Federal Labor has sought to reassure voters it will be conservative in its budget management, pledging to run a surplus over each of its first three years.

When reminded of his record of high interest rates when he was treasurer under Malcolm Fraser, Mr Howard merely said that as prime minister he had presided over the lowest interest rates in a generation and issued a warning on how industrial relations under Labor would affect interest rates.

"The other thing Labor will do is they'll wreck the industrial relations system we now have, which will deny the productivity gains of past years," he said. "You'll have wage increases not based on productivity, and the only response that the monetary authorities have to that development is to lift interest rates."

But Melbourne University professor John Freebairn says the remarkable change during the 1990s was the growth of productivity, which had slowed over the past four years.

If people kept seeking 3 per cent wage increases, outstripping productivity gains, inflation and interest rates would rise.

Macquarie Bank economist and former Reserve Bank staffer Rory Robertson says the question of who is in government has mattered little to the direction of interest rates since the Reserve Bank was given the mandate to target inflation by the Keating government in 1993.

In its latest quarterly statement on its management of interest rates, the RBA commented: "It would be surprising if Australian interest rates did not have to increase further at some stage in the current expansion."

Although Treasurer Peter Costello has interpreted that comment to mean some time over the next several years, the market believes it means within the next few months.

 

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