Howard’s double bind on interest rates

Tuesday, 14 August 2007 

Matt Price asks a good question in The Australian this morning: why did Labor focus on housing affordability in parliament yesterday rather than the statement by four coalition MPs that they doubted the importance of human activity on global warming? As he rightly states, climate change was one of the issues that started the government’s rot. As climate change became the new orthodoxy of international relations, the government’s unwillingness to go along with it was a sign, along with its position on Iraq, that it was now out of line with international trends.

However, the focus on housing affordability shows just how far the rot has gone. This was starkly illustrated by the reaction to the Reserve Bank’s monetary policy statement published yesterday. Reaction was almost entirely focussed on the RBA’s hints that another interest rate rise was coming – but not one of the important reasons why it would be. According to the RBA:

Households’ net worth has continued to rise as the increase in the value of household assets has exceeded the increase in their debt; house price growth has been firm and despite the recent correction in the share market Australian equity prices were up by around 8 per cent for the year to date at the time the Statement was finalised [9 August]. As discussed in the March 2007 Financial Stability Review, most households are coping well with their higher debt obligations. While there has been some increase in loan arrears and other indicators of financial distress, they are generally still at low levels.

That March Review estimated that only 5½% of householders are struggling with high debt servicing ratios above 50%. The RBA also noted that a strong rise in mortgage arrears was largely confined to New South Wales, especially following the slump in property values in western Sydney, but this was during 2004 – 2005 and actually fell in 2006. According to the RBA, this low level of debt is reflected in the still strong growth in household spending, which would add upward pressure to interest rates.

So here’s the irony, the government is not only getting attacked for higher interest rates, but also for a problem that the RBA thinks there is so little evidence of that it would make higher rates more likely! How the government can get caught in this double bind shows that this issue is not directly about interest rates and housing affordability but more about how the government responds to it. This is an anti-political campaign to ram home the message that politicians are out of touch, and added to the reminder of the Liberals’ 2004 campaign promise for record low interest rates, are not to be trusted as well. There has been little challenge to how this campaign is presented from those media commentators that are looking for evidence to confirm their view that the electorate never thinks above its hip-pocket.

Until now, the coalition appeared not to be getting the anti-politics element in this attack. However, yesterday Howard looked as though he was starting to pick up how the game was played when he cautiously welcomed Rudd’s proposal for subsidising low income renters. Unfortunately, any benefit from this change in tack was mostly swept away by the politically astute Treasurer a few hours later when he ridiculed the proposal.

Posted by The Piping Shrike on Tuesday, 14 August 2007.

Filed under Tactics

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