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Interest rates set to rise -

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Interest rates set to rise

Reporter: Michael Brissenden

KERRY O'BRIEN: Welcome to the program. Later I will be talking with Immigration Minister Amanda
Vanstone about the missing Australian resident who languished in a State prison and immigration
detention centre for 10 months. But first - interest rates. The Treasurer, Peter Costello, says
that at around 6 per cent, we've been enjoying an interest rates honeymoon for the past 14 months.
But it seems the honeymoon may soon be over. Today the Reserve Bank gave its strongest indication
yet that interest rates would be on the way up again soon. Despite a cooling housing market, the
bank says the prospect of higher inflation, skills shortages and the prospect of wage increases
will see monetary policy tightened in the months ahead. This comes just a few months after the
Government fought and won an election campaign targeting the fears of a now highly mortgaged
electorate. Political editor Michael Brissenden reports.

MICHAEL BRISSENDEN: Well, if you didn't know what the main plank of the government's re-election
strategy was last year, you would have had to be walking around with your eyes closed and your ears
blocked. This was the interest rates campaign, and even with the cordite from the starter's gun
still in the air, the issue was one of trust.

JOHN HOWARD (PRIME MINISTER): Who do you trust to keep interest rates low?

MARK LATHAM (FORMER OPPOSITION LEADER): I'm going to sign Labor's low interest rate guarantee. My
word is my bond.

JOHN HOWARD: The last 10 days of this election campaign are a referendum on who can better keep the
Australian economy strong and interest rates low.

MARK LATHAM: We're putting the downward pressure on interest rates compared to Mr Howard's spending
spree.

MICHAEL BRISSENDEN: Of course, we now know who won that debate and why. Labor, under Mark Latham,
didn't have a convincing alternative attack against the constant barrage and historical reminders.
You didn't need to be a political strategic genius to know that few who lived through the 17 per
cent interest rates of the Hawke-Keating era needed too many prompts to relive the pain. But now,
for the first time since the October 9 poll, the Reserve Bank Governor says interest rates may well
be on the way up again soon. In the Governor's first quarterly policy statement for the year, the
bank says a combination of inflationary pressure and the effects of continuing firm demand could
lead to wages pressure that could lead to the need for further monetary tightening in the months
ahead. Those in the know say it's a pretty blunt message.

STEPHEN KOUKOULAS (TD SECURITIES): Well, the Reserve Bank statement was very hawkish, and by that I
mean that they expressed concerns that inflation pressures are starting to build.

CHRIS RICHARDSON (ACCESS ECONOMICS): They're worried about inflation rising, they're worried about
skills shortages and they're worried that they'll therefore need to put up interest rates here in
Australia. They've been hinting for a while, but they've just stepped up their rhetoric.

MICHAEL BRISSENDEN: But for the Labor Party, still looking desperately for a way to rebuild some
economic credibility, today was a told-you-so moment. Just remember, interest rates haven't
actually gone up yet, but it'd be a fair bet that this response has been sitting in Wayne Swan's
top drawer just waiting for the first whiff of upward movement.

WAYNE SWAN (SHADOW TREASURER): The Prime Minister constructed a political campaign that gave the
electors of this country the impression that interest rates would not rise under the Howard
Government. That was the subliminal message that the Liberal Party campaign pumped out only a few
short months ago, and now, we face the prospect of higher inflation and higher interest rates,
which is a direct result of Federal Government complacency. The Government has been aware of skills
shortages, the Government has been aware of infrastructure bottlenecks, but it has sat on its hands
and it has simply been smug and complacent. We've heard Treasurer Costello and Mr Howard
continually deny that there's a problem with the current account deficit. They've blamed it on the
dollar, they've blamed it on the drought. Well, this report blames it on the Howard Government.

PETER COSTELLO (TREASURER): Well, look, Labor can say what it likes, but the truth of the matter is
that in Australia's near full employment economy - 5.1 per cent - with inflation between the band
of two to three per cent, with an economy which is still growing, I think interest rates have been
stable for 14 months and at historic lows. From memory, the home mortgage interest rate is - what
is it - 6.25, I think, and when Labor left office, it was 10.5.

MICHAEL BRISSENDEN: Well, yes, but this Government would be the first to recognise just how potent
the whole interest rate fear is, especially now, with a nation more heavily geared than ever, and
certainly much more heavily geared than it was when rates were at 17 per cent or even 10.5. At
least some market watchers believe that despite all the rhetoric about who to trust with interest
rates, the government's own big-spending election campaign was at least partly to blame.

STEPHEN KOUKOULAS: There's never one issue in isolation that causes rates to go up or to go down,
but I think when we look through the checklist of issues that have forced the Reserve Bank to send
a signal today that rates are about to go up, one of the issues that's certainly in the plus side
is the extra government spending, the cash handouts that were all during the election campaign at
the middle of last year.

MICHAEL BRISSENDEN: But not all economists see the same things in the tea leaves. Some, like Chris
Richardson from Access Economics, actually believe the Reserve Bank is jumping too late.

CHRIS RICHARDSON: I think the Reserve Bank is still locked in last year's mindset of a very strong
Australian economy. Some of our great growth has already disappeared, but the bank still doesn't
believe the official statistics coming out of the ABS. That means it runs the risk of making the
wrong decision and pushing up rates at a time when retail's already flat.

MICHAEL BRISSENDEN: Still, whatever the economists think, the real dispute and the real leverage is
at the political end of the argument.

WAYNE SWAN: Well, there's no doubt what the Reserve Bank is saying, that we're going to have higher
inflation and higher interest rates, and why are they saying that? They're saying that because we
have skill bottlenecks out there, we have infrastructure bottlenecks and we have skill shortages.
Now, these skill shortages and infrastructure bottlenecks are a direct result of Federal Government
complacency. The Government has simply been asleep at the wheel.

MICHAEL BRISSENDEN: The Government, of course, says what's needed is more reform - IR reform in
particular.

PETER COSTELLO: If you were to get, in a very low employment economy, wage rises which were not
based on productivity, and if that were to move into inflation, then obviously we'd have to take
action to contain inflation. But the important news is that we can manage these expectations with a
round of reform in industrial relations.

MICHAEL BRISSENDEN: There's a lot of "ifs" there, isn't there? Still, whoever's right and whatever
the causes, it looks like we're in for some interest rate pain in the short term. Given the big
mortgages most of us now have, a big rise would have serious political impact. But so far, the
prospect of a small increase only has both sides scrambling to find political advantage, and the
rest of us simply scrambling to find the extra money to pay for it.