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Predictions that interest rates will rise whoever wins the election; markets are concerned over policies of both parties

ELLEN FANNING: The economist, Des Moore, thinks Dr Hewson is only telling half the story about the dollar's dive. Mr Moore is a Senior Fellow with the Institute of Public Affairs, and sees himself on the right of the political spectrum. He says that the depreciation of the dollar is due to adverse market reaction to the stimulatory policies of both the Government and the Opposition. Des Moore says what voters are not being told by either party is that, regardless of who wins the election, the likelihood is that interest rates will have to rise. That being the case, it could mean a double-dip recession for the country. Earlier this afternoon Des Moore spoke with our chief political correspondent, Maxine McKew.

MAXINE McKEW: Des Moore, Bernie Fraser's view that John Hewson's public comments have contributed to the fall in the dollar, is there something in that or are there other factors driving the depreciation of our currency?

DES MOORE: Well, there could be something in it at the margin, although the Reserve Bank itself, in its January bulletin, said that there was current nervousness in the foreign exchange market, and that was the reason why it couldn't lower interest rates. I think much more substantially the markets are concerned about the way the current account deficit has developed and the way that policies of both of the political parties have developed.

MAXINE McKEW: Why concern about policies of both parties?

DES MOORE: What people are concerned about, I think, is that we now have a situation where both parties are expanding their call on savings at a time when our current account deficit, our draw on foreign savings is running ahead.

MAXINE McKEW: So when John Hewson says the dollar is diving because the markets are making a judgment about the Government's foreign debt, he's only telling, what, half the story?

DES MOORE: Well, he's only telling part of the story. I think there's an air of unreality entering into the whole of the national debate, that we're in danger of going into an election campaign about policies, or will avoid debating policies that will have to be implemented regardless of which party comes into office after the election.

MAXINE McKEW: Those policies being?

DES MOORE: Well, there are really three ways in which we can overcome this current account deficit problem. We can cut back on public sector spending, and at the moment there's no sign of that. Both the political parties are promising increases in public sector spending. Or we can cut back on private sector spending and the way to do that would be to increase interest rates, and neither party has indicated an intention to do that or even discussed it. Or we can allow the currency to depreciate further. And I think what is happening - and that, of course, will put up the price of imports and make it too expensive for people to spend money on imports.

And I think what the markets are speculating on is that given the political parties may not face up to either one of the first two possibilities that the currency may have to go down even further. And so we have a situation where, for example I understand today Merrill Lynch has issued a note in New York that suggests the currency could go to as low as 63 cents in the dollar.

MAXINE McKEW: And yet, implicit in what Dr Hewson is saying is that somehow the dollar would be healthier with a Coalition victory. Is there any reason to believe that would be the case, given their present spending policies?

DES MOORE: The only reason to believe it is that, from a medium term perspective, Dr Hewson has indicated an intention to keep inflation under control, keep it within zero to 2 per cent, which of course it's running at at the moment anyway. The Government has indicated it won't give any such firm commitment. But I don't think that is a serious short-term influence on the situation because, as I say, inflation is already down at relatively low levels, and most people are not expecting it to emerge as a major force that might threaten the dollar in the short term - by that I mean the next year or so.

MAXINE McKEW: Isn't Dr Hewson, though, if he wins, likely to be the beneficiary of a slightly improved current account, given that yesterday's figures were greeted quite positively?

DES MOORE: Well, yesterday's figures were certainly an improvement on what we have seen. But, I mean, I don't think you can just look at one month's figures. And the thing that really worries me is that in this six months where we had the blowout in the current account deficit, we also had a situation where private capital was actually flowing out of the country in net terms. We had a loss of private capital of nearly a billion dollars in the first six months of this year, and for a country such as Australia that is a major net importer of capital to be in that situation when we have a current account deficit running around nine to ten billion dollars in that six months, is quite extraordinary and it is quite unsustainable.

The situation is that we are financing the current account deficit either by running down reserves, which is the point of controversy with the Reserve Bank and which involves clearly a major change in central bank policy which it has not really acknowledged publicly, or by State Government borrowings overseas. And neither of those is a sustainable policy.

MAXINE McKEW: That being the case, as you see it, is it inevitable then that whoever wins Government, they will have to either, what, let the dollar fall or raise interest rates?

DES MOORE: Yes, or adopt a much tougher public sector spending approach than either of them are saying. And I suspect it possibly will be a combination of all three.

MAXINE McKEW: But if we see interest rates go up while the recovery is still struggling, could we dip back into recession?

DES MOORE: We could easily. And unless action is taken in a very well-judged way, we could easily see the situation where interest rates have to be put up very sharply, as has occurred in a number of countries in Europe where there's been speculation against the currencies and where their domestic policies have not been acceptable to foreign exchange markets. We might have to do that rather suddenly unless we face up to these problems fairly quickly.

MAXINE McKEW: And, of course, that's not something that either party is likely to admit to over the next couple of weeks.

DES MOORE: Certainly not. And that's why I say I think there's a significant air of unreality entering the whole debate in the lead-up to the election.

ELLEN FANNING: Des Moore, the Senior Fellow with the Institute of Public Affairs.