Friday, October 26, 2007

Interest rates - why, oh, why?

Maybe if I smile they'll forget I'm an arrogant disingenuous arsehole

The Prime Minister, John Howard, has backed away from a Liberal advertisement in the 2004 election campaign promising low interest rates, saying they were pulled from air after only two days.


Now maybe this is correct, maybe they did run for only two days, but I gotta tell you, they are the thing I remember most about the last election campaign.

I still remember where I was when I heard the first one on the radio. I still remember my immediate thoughts ("How the hell do they think they can get away with making that claim?"). But make that claim they did. I saw the ad repeatedly on the tele too. You cannot claim to keep interest rates low (or lower than a Labor government in this case) when you don't set the interest rates!

I suppose after 5 interest rate rises in 3 years, and another one seemingly imminent, they have to face up to the fact that for however long those ads ran, they did their job a little too well - they are still burned into the psyche of everyone who took even vague notice of the last election. They are evidence that the government will say anything they can to scare you into voting for them.

A very basic economics lesson for everyone. The RB increases interest rates because they want to reduce spending. Spending is high precisely because the economy is strong. By increasing the interest rates, they are reducing the speed of the growth of the economy. Why? Because if the economy grows too quickly, it will cause inflation. By increasing interest rates and therefore reducing the demand for money (and spending), they are reducing the chance of inflation.

It's a fine line, which is why there is always a concern when governments cut taxation rates - will there be upward pressure on the interest rates?

But run for your lives! There's a "financial tsunami" on the way!

An interest rate rise before poll day is viewed as a near-certainty by market economists, but Mr Costello said inflationary pressures in the economy would abate next year.

He said inflation remained within the target band, and much lower than previous episodes in Australian history when it had peaked above 16 per cent.

The Government's re-election pitch is "go for growth", and Mr Costello said Australians seemed to have forgotten that recessions every decade or so were the "normal" state of affairs.


So, Captain Smirk. That would be a "recession we [have] to have", wouldn't it then? Jesus Christ, even their choice of words are intended to provoke fear in people. Tsunami = mass devastation.

"It is almost as if people have become so used to growth that they think a recession can't happen in this country. I don't believe that the business cycle is defeated. At some point the business cycle will turn down, no doubt about it.

"We don't want people to think that recessions have been abolished in this country."

On the subject of rising consumer prices, Mr Costello said it was normal for people to complain. "Nobody's ever going to feel entirely happy with everything," he said. Life in the real world would always be "this side of heaven".

"People don't like price rises. The important thing is to keep price rises to a minimum."

But he dismissed the idea that cost of living pressures would be a vote changer. "I think people will say, well, we understand why that is happening. I don't think that is a vote-change issue because it's not a government decision."

No it isn't. Shame you weren't willing to admit that in the last election campaign, hmmmm?

UPDATE: jamesm has a very good explanation about interest rates over on Mikey's blog.