Saturday, May 06, 2006

Paul McIntyre: Costello spits tacks over rates rise

Up went official interest rates on Wednesday to their highest levels since early 2001 - 5.75 per cent - and didn't Australia's federal Treasurer, Peter Costello, kick up a stink.

Completely unnecessary, he said, reminding the world that next Tuesday's annual Budget would carry an alternative forecast on inflation and its likely impact on interest rates.

The only mob which won't give a toss about this week's rise - the first in 14 months - is the one living in the boom state of Western Australia. Its housing market and broader economy continues to travel at high altitude off the back of the global commodities boom. The big, flashy state of New South Wales, meanwhile, is trying desperately to get off the ground and the latest interest rate movement is not going to help, particularly as it faces a declining property market.

The latest annual growth rates of state economies show just how much Western Australia is benefiting from the resources boom: It's up 9.2 per cent, followed by Queensland on a very respectable 6.5 per cent, Victoria 4.3 per cent and New South Wales bumping along at 2.3 per cent.

A recovery in the New South Wales property market and broader economy is not expected now until next year. Benchmark Sydney house prices fell again in the March quarter, according to Australian Property Monitor figures released on Thursday, although the trend was the same for all eastern state capitals. No surprise that Perth was the only exception to the downward pressure on home prices.

It's partly this trend which has Costello begging to differ on the overall direction of the Australian economy with Reserve Bank of Australia governor Ian Macfarlane.

Macfarlane is worried about forecasts of further global economic growth and its positive impact on Australian exports along with return to credit growth in the domestic market. Indeed, one of the key reasons for the bank's interest rate rise this week was that households, which last year started to consolidate their balance sheets and slowly rebuild savings, have begun borrowing again and Macfarlane said the sobering effect of declining house prices on consumer spending might have stopped. The bank noted a rebound in credit growth since it touched a low in the September quarter last year.

"These domestic and international trends have added to inflationary pressures in an economy that has been operating for some time with rather limited spare capacity and low unemployment," Macfarlane said.

Costello, however, wasn't buying the central bank's rationale. "There is a lot of respectable opinion each way on this decision and it was a line-ball call which was taken by an independent bank," he said. "We note its decisions and we note its reasons but we will be producing our own inflation forecast in the Budget next Tuesday."

Prime Minister John Howard also had a view on the rate rise: "I don't think [inflation] is taking off. I think what the Reserve Bank is saying is that there are some inflationary pressures and pre-emptive action now will mean less action later."

That was also the view of Westpac's chief executive, David Morgan, who this week announced a 16 per cent rise in earnings for the six months to March but saw the bank's share price cut by 2.6 per cent on Thursday. Morgan, in fact, said he would have preferred an interest rate rise in February for Australia but is now calling for a easing in rates in New Zealand.

"On balance I would have recommended the move," Morgan said of the Reserve Bank decision. "I think this is a gradual and measured move in response to the slow build-up of inflationary pressures."

Access Economics director Chris Richardson, however, wasn't so convinced. "The Reserve Bank is clearly trying to slow the economy down and the Government is showing every sign of trying to speed the economy up," he said. "We would be better off if both did nothing."

Most most say the main impact of the rate rise will be as a warning shot.

Geoff Austin, head of retail products at the Commonwealth Bank, Australia's biggest home lender, is not concerned by the rise. 'If there were four or five increases in a row, you might see more stresses but I don't think a single rise of this magnitude will have much of an impact," he said.

And if it does get tough, there's always work in the mines of Western Australia.

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