Recovery spells doom for low interest rates
By Jacob Saulwick, National Correspondant | smh.com.au | 29 September
The Federal Government's stimulus measures have passed muster with Glenn Stevens, who has indicated he is keen to start lifting interest rates.
The Reserve Bank governor yesterday suggested the peak in unemployment may not be far away, another pointer to a possible rate rise next week.
Speaking to a Senate inquiry into the stimulus, Mr Stevens declined to call on the Government to pull back on spending ahead of schedule. But he said interest rates would need to rise to prevent unsustainable increases in house prices or other assets.
Mr Stevens's comments are the latest plank in a remarkable improvement in mood about the economic outlook. So far, Australia's downturn had been "much less serious" than the recessions of the 1970s, 1980s and 1990s, he said.
He added that if unemployment – now 5.8 per cent – peaked at "six point something" it would be very low compared with past downturns.
"It is reasonable to conclude, against the benchmarks of historical experience of our own and comparisons with experience abroad, that Australia has done quite well," he said.
But as the prospect of an economic recovery strengthens, so too does the chance of an interest rate increase. Rates for fixed-rate mortgages have been rising for months.
Yesterday the Commonwealth Bank told brokers it would lift fixed interest rates by up to half a percentage point.
The increase means that CBA and Westpac, which have grabbed the lion's share of new mortgages in the past six months, are charging the highest rates on fixed-rate mortgages, according to the market researcher Infochoice.
Mr Stevens offered little support to the Opposition's attack on the stimulus spending. When asked if the Government should rein in the program, he said the structure of the stimulus package meant it would naturally start to peter out.
"The presumption we're making is that things will be delivered and then wind back more or less on the schedule that's set out in the budget.
"There's probably going to be a bit of slippage, but if it's only a few months that's not really a big deal. We're assuming that withdrawal occurs more or less on that schedule.
I'm not sure I'd say that outlook is a terribly worrying outlook, really. This has been a good episode for Australia."
If the Government wanted to spend less money now the economy was improving, that was up to it. "Whether there's a case for the Government to have in their top drawer a plan B, there might be. How feasible that is I can't really answer".
He said there was little evidence borrowing by the Australian Government would push up interest rates. The bigger danger was in the build-up of debt by the United States and Britain. The Reserve Bank board meets next week.
A number of financial market economists believe that if the board does not increase rates then, a rise is likely before Christmas.
The Treasury Secretary, Ken Henry, was to appear at yesterday's hearing in Sydney, but his appearance was postponed because Opposition senators wanted more time to consider his response to written questions.
First published by Smh.com.au on September 29 2009
Visit smh.com.au for the latest news updated throughout the day
