Friday, July 28, 2006

Interest Rates, the Reserve Bank & Governemnt

Prime Minister John Howard claims that the most recent CPI increase (inflation at 4%) is outside the government's control, and that the Reserve Bank should look at NOT raising interst rates next Tuesday.

There are two problems here:

1) Mr Howard claims that low CPI & interest rates are to his credit, but that higher CPI figures are not the fault of his government.

Certainly governments cannot control the weather patterns (gloabl warming is a separate social issue for the world) or high prices of crude oil, which are governed by the insatiable demand by heavily industrialised nations and rapidly developing nations. However, Mr howard is a proponent of going to war inthe the Middle East. The wars in Afghanistan and Iraq, the support of the US and other nations, including Australia, for Israel's relentless attacks on Lebanon all contribute to instability in the Middle East and market nervousness about future oil supplies. This is not an argument about whether the military actions in the Middle East are justified; just that the military actions DO create market nervousness and DO contribute to higher oil prices.

To the extent that Mr Howard supports the war in the Middle East, he has certainly contributed to the poor CPI figure.

He has further claimed in the past that previous Labor governments caused high interest rates, but he tells us and his nervous backbenchers that it's not his fault. He really can't have it both ways.

2) The Reserve Bank is an independent body. It is inappropriate for the Prime Minister, or any other member of Government, to tell the Reserve Bank how they should manage Australian interest rates.

The Analyst