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Doubts on durability of interest rate cut



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Senator ¬ęT im Short. Shadow M inister for Finance and Shadow Minister Assisting the Leader on Commonwealth/State Relations

SMF 46/92

DOUBTS ON DURABILITY OF INTEREST RATE CUT

Well might the Treasurer "stand ready to increase interest rates i f circumstances require

His unease about the durability of today's one percentage point fall in cash rates is no doubt due to the fact that the Government may soon be forced to increase interest rates as it borrows heavily to fund its burgeoning Budget deficits.

On top of that, the deterioration of the current account and the need to borrow increasing amounts from abroad have also forced the Treasurer to leave the way open for higher interest rates in the near future.

The Budgetary situation shows the Government's incompetence. Up to the end of March the deficit stood at $11.2 billion, a long way above the 'expected' deficit of $6.8 billion (which has already been revised upwards twice). Senior Government sources have conceded that a third revision will be necessary because the deficit will be higher than $6.8 billion

If, as expected, a review of the deteriorating Budgetary situation is due to take place mid-May, sound economic management would have suggested that a rate cut of today's magnitude be deferred until th at review was completed.

The ballooning deficit has to be funded by the government borrowing from the private sector. Its demand for funds will push up interest rates and therefore make more difficult any significant recovery in the tradeable goods sector.

No wonder the Treasurer is nervous.

Canberra 6 May 1992

COMMONWEALTH PARLIAMENTARY LIBRARY MICAH

Further information - Senator Short 06-277 3119