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    Default Kevin Rudd warns homeowners: interest rates to rise fast

    Kevin Rudd warns homeowners: interest rates to rise fast

    George Megalogenis and Scott Murdoch | July 27, 2009

    Article from: The Australian
    THE Rudd government is preparing voters for a series of interest rate hikes ahead of the next federal election as money markets expect official rates to rise by almost 1 per cent within the next 12 months.
    Kevin Rudd has warned that higher interest rates were inevitable over the next 18 months, while Finance Minister Lindsay Tanner has said another round of spending cuts would be required to ensure the budget returned to surplus.
    But the government is not ready to call an end to the downturn, and will press ahead with the remainder of its $77 billion stimulus program to guard against a spike in unemployment.
    "We have to rein in spending, we have to get the budget into surplus as quickly as we can, but not at the expense of jobs or the overall economy," Mr Tanner said yesterday.
    Labor appears willing to risk having fiscal and monetary policy run in opposite directions while the economy stabilises. This will open the door for the opposition to blame any sequence of interest rate rises on Labor's budget deficits.
    Mr Tanner's comments yesterday are the strongest signal yet that the government has decided to err on the side of jobs. "We have a big challenge to meet with debt, but we will meet the challenge," he said.
    "Our primary objective, though, is to sustain jobs, to keep people in employment, keep businesses open."
    Money markets are predicting that interest rates could start moving as early as December
    By July next year, the Reserve Bank's cash rate is expected to be 90 basis points above its present low of 3 per cent. This implies as many as four interest rates increases in the next
    12 months.
    The Reserve is wary of inflation popping out again. The government, by contrast, is worried that unemployment will continue to climb even after the economy has turned the corner.
    Wayne Swan used the deepening recession in Britain to pour cold water on local optimists who are predicting that Australia will avoid recession altogether, and that unemployment would settle below 8 per cent.
    Britain has contracted for five quarters in a row, and its annual slump is the worst since records began in 1955.
    "While global policy actions have helped to restore confidence and limit the decline in global output, we know that the consequences of this global recession will be felt for some time to come," the Treasurer said yesterday in his latest economic note.
    "That's why it is so important that we maintain our stimulus plans to support the Australian economy, business and jobs."
    The Prime Minister at the weekend flagged the downsides of recovery. "Unemployment will continue to rise even after growth returns," Mr Rudd said. "On average in recent economic crises, unemployment has peaked 13 months after growth turns positive."
    On interest rates, he warned: "Over the next 18 months, rising growth will inevitably cause interest rates to rise off their record lows."
    Australia has yet to slip into technical recession. The budget assumed that gross domestic product would go backwards in the December quarter last year and the March quarter this year, and that unemployment would reach 6 per cent in the June quarter.
    But the national accounts showed that GDP grew by 0.4 per cent in the March quarter, and unemployment was noticeably lower at 5.7 per cent in the June quarter.
    These small but telling differences, combined with surging consumer confidence and a buoyant first-home buyer
    market have encouraged a number of market economists to revise up their own forecasts and say Australia will avoid recession altogether. But the government is sticking with Treasury's forecast of recession, with sources noting that the contraction expected over the course of 2009-10 would be due to a collapse in private business investment. The budget said unemployment would peak at 8.5 per cent in the following financial year.
    One of Mr Rudd's most obvious political dilemma's is how tighter monetary policy would clash with the timing of the next election, due by the end of 2010.
    The opposition is war-gaming for an early election before next May's budget. The thinking in the Liberal camp is that Labor won't want to tell voters where it will cut spending to achieve its promised surplus by the middle of this decade.
    But government sources insist there will be no early election called unless the opposition obstructs key legislation, such as emission trading.
    The complication for Labor is that any election next year risks being held against the backdrop of higher interest rates.
    The standard variable home mortgage rate of 5.8 per cent is the lowest in more than three decades and among the lowest in the world.
    The Reserve Bank has cut 425 basis points from the official cash rate since September last year and 380 basis points of that relief has been passed on to borrowers.
    Australian home owners are among the most exposed to interest rate moves in the world, with 80 per cent of home mortgages set at the standard variable rate.
    Westpac's head of mortgages, Axel Boyce-Moller, said the health of the Australian banks had allowed more of the official rate cuts to be given to customers compared with the US and Britain, where a significant chunk had been retained by the banks.
    "The strength of the Australian banking system has been of great benefit to the Australian economy during the global financial crisis with interest rate reductions playing a key role in helping improve housing affordability," Mr Boyce-Muller said.
    Citi's chief economist in Australia, Paul Brennan, said the Reserve Bank would have to raise rates in December.
    "The fiscal and monetary policy stimulus in Australia has been very early and very large," Mr Brennan said. "Both business and consumer confidence have rebounded and household demand has picked up."
    Harvey Norman executive chairman Gerry Harvey said the worst of the economic downturn had passed and consumers were more optimistic about the future.
    "This all went off a cliff on the first of January 2008 so every month in 2008 was pretty ordinary," Mr Harvey said.
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx


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