The Guardian August 23, 2000

Here comes another 0.25%

by Anna Pha

What's a mere 0.25 percent rise in interest rates? For someone with a 
mortgage of $100,000, the Reserve Bank of Australia's (RBA) last such rate 
hike, on August 2, brings the total increase in monthly repayments since 
November to $100 or more. The next increase could be announced as soon as 
September 5  another 0.5 percent could add another $32 a month to the 
same home loan.

Add to that to the rising credit card and car loan interest rates, and the 
government's much vaunted tax cuts have been more than swallowed up, even 
before you add in the cost of the GST.

There have been five RBA increases in interest rates since last November, 
raising the official rate from five percent to the current 6.5 percent.

Every increase has been quickly passed on in fees and charges by the banks 
and financial institutions.

The RBA explained away its last increase as necessary to hold back demand 
and counter inflationary pressures arising from:

* strong credit growth;
* the underlying strength of the economy;
* future increases in labour costs; 
* lower unemployment and; 
* changes in the value of the dollar.

The aim of the interest rate rises is to prevent inflation rising outside 
the RBA's target of two to three percent per annum. The target is part of 
an agreement between the Reserve Bank and the Government in which the 
government has handed over responsibility to the Reserve Bank and the big 
business representatives on its board.

The RBA makes no mention of the impact of the GST, even though the GST is 
pushing up prices: the big retailers actually pre-empted the GST and 
increased their prices prior to its introduction  hence the rise in the 
Consumer Price Index.

Interest rate increases have usually have a contractionary effect on an 
economy, resulting in people and businesses having less money to spend 
after they have had to pay more on their loans.

So, the GST is creating price inflation, but how strong is the underlying 
economy? Has the RBA got it right? Or is it trying to hold back demand at a 
time when real growth is slowing and a recession threatening?

It is worth looking at where the increased demand is coming from. 

One source is the pre-GST buying splurge  much of it on credit  meaning 
the savings will be eaten into by higher interest rates on credit cards.

This source of growth in demand is hardly likely to be sustained.

Another source has been the building and construction boom, especially the 
pre-Olympic boom in Sydney.

This sector is an important indicator of economic growth.

Last month there was a large slump in the number of approvals for new 
housing  around 18 percent  bringing the level of approvals down to 
that reached during recent recessions.

Employer body the Master Builders' Association is predicting a loss of 
100,000 jobs in the industry. The job losses have already commenced 
according to the Construction, Forestry, Mining and Energy Union. Several 
construction companies have already gone bust.

The interest rates add to the difficulties of workers, the unemployed and 
students with debts to pay at a time when they are grappling with higher 
GST prices.

Once the mortgage or rent (indirectly linked to interest rates) and other 
interest payments are made, with the GST adding to their costs, workers' 
purchasing power is reduced i.e. reduced demand for goods and services.

For small businesses, the timing of the interest rate rises could not have 
been worse, as they grapple with the higher interest payments as well 
liquidity problems and other GST-related expenses.

For the banks and their major corporate investors and depositors, every 
increase is another windfall. And we can all expect another 0.25 or 0.5 
percent in September!

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