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Real interest rates at record levels - despite the pre-election promises



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Deputy Leader of the Opposition NEWS RELEASE BY JOHN HOWARD MP D32/85

REAL INTEREST RATES AT RECORD LEVELS - DESPITE THE PRE-ELECTION PROMISES _________________________ ; __________________ __ _________

, Real interest rates - that is interest rates adjusted for the

effects of inflation - in Australia at present, are the highest

they have been since the Great Depression of the 1930s and there

is little prospect of any relief from this situation in the

immediate future.

This is the case despite promises made by both the Prime Minister

and the Treasurer before the last election that interest rates

would fall in 1985.

In the light of the interest rate hikes which have occurred

across-the-board over the past few weeks, Australians are

entitled to feel grossly deceived by the reckless predictions of

Mr Hawke and Mr Keating on this issue before the last election.

Real interest rates for housing loans have increased more

, than six-fold since Labor was elected in 1983.

Real housing loan interest rates were 1.01 in March 1983 - now

they are about 6|I.

As a result, new home buyers and people with mortgages are now

paying more in real terms on their loans than they have in 50 years.

The increase in real interest rates is of course partly due to the

reduction in inflation over the past 18 months. However the fact

remains that nominal interest rates have not come down at all with

that fall in inflation and they are now as high as they were in 1983.

In other countries - such as the USA and Japan - there have been

falls in both nominal and real rates over the same period.

The present high level of interest rates is due to a number of

factors including the high Federal Budget deficit and an excessive

public sector borrowing requirement.

Furthermore, the recent suspension of monetary targeting unsettled financial markets and was a contributory domestic cause of the recent slump in the value of the Australian dollar. . . / 2

%'

V

2.

Inevitably one response of the authorities to a weaker

dollar was to boost short-term interest rates.

The Treasurer constantly criticises the conduct of

monetary policy of the former government, yet his own

performance in this area in recent months has been less

than distinguished.

During the first few months of this financial year he

deliberately pursued a loose monetary policy to prevent

interest rates rising prior to the December 1984 election.

The inevitable result was a blow out in the money supply.

This, rather than his excuse that deregulation means that

the figures cannot be interpreted properly, is the real

reason for abandoning the target.

The Treasurer, in using that excuse, is asking us to believe

that his advisers in the Reserve Bank and the Treasury do

not know what is happening to the money supply, or at least

they cannot interpret the figures.

This is plainly not the case. It is the deliberate policy

decisions of the Treasurer which have created the

difficulty.

Canberra

24 March 1985

Two tables attached.

ATTACHMENT A

HOUSING INTEREST RATES 1950-1975

Year Savings Bank Housing

Loans

Actual % p .a .

CPI Change (fin­ ancial year) 1

Real Interest Rates %.

1950 3.88 13.0 (1950/51) - 8.1

19 SI 3.88 22.5 (1951/52) -15.2

1952 3.88 9.4 - 5.0

1953 4.5 1.9 2.6

1954 4.5 0.7 3.8

1955 4.5 4.1 0.4

1956 - 5.0 5.8 - 0.8

1957 5.0 1.0 4.0

1958 5.0 1.6 3.3

1959 5.0 2.5 2.4

1960 5.0 4.1 0.9

1961 5.75 0.4 + 5.3

1962 5.75 0.2 + 5.5

1963 5.25 ' 0.9 4.3

1964 5.5 3.8 ' 1.6

1965 5.75 3.6 2.1

1966 5.75 2. 7 . 3.0

1967 ■ 5.75 ■ 3.3 2.4

1968 ' 5.75 2.6 3.1

1969 6.25 3.2 3.0

1970 8.25 . 4.8 3.3

1971 8.25 6.8 1.4

19 7 2 7.75 6.0 1.7

1973 ■ 7.75 12.9 - 4.6

1974 9.5 16.7 - 6.2

1975 - 11.5 13.0 - 1.3

SOURCE: Reserve Bank Occasional Paper No. 8A Australian Statistics 1949-50 - 1978-79.

ATTACHMENT B

INTEREST RATE ON HOUSING LOANS TO INDIVIDUALS FOR OWNER OCCUPATION, NOMINAL AND REAL - 1975-1985

Nominal CPI Movement Real

1975 March 11.5 17.6 - 5.2

September 11.5 12.0 - 0.4

1976 March 10.5 13.4 - 2.6

September 10.5 14.0 - 3.1

1977 March 10.5 13.7 - 2.8

September 10.5 13.1 - 2.3

1978 March 10.0 8.3 1.6

September 10.0 7.9 1.9

1979 March 9.5 . 8.2 1.2

September 9.5 9.2 0.3

1980 March 10.5 10.5 0

September 10.5 10.3 0.2

1981 March 11.5 9.4 1.9

September 12.0 9.0 2.8

1982 March 13.5 10.6 1.1

September 13.5 12.3 1.1

1983 March 12.5 11.4 1.0

September 12.5 9.3 2.9

1984 March 12.0 7.6(a) 4.1

September 12.0 6.1(a) 5.6

1985 March 12.0-12.5 5.1(a) 6.6-7.

(a) Excludes Hospital/Medical component

Source: Parliamentary Library Statistics Group