Tuesday, March 04, 2008

Interest Rates, The Economy and Tax Cuts

The Reserve Bank lifted the official cash (interest) rate by 0.25% to 7.25% from 5-March-2008. Banks will follow suit quickly, and might raise their rates by more than 0.25%.

However, the RBA noted that there is some evidence of slowing of household demand. The RBA noted that there is likely to be another rise this financial year (before end of June), before perhaps moderating next year as demand slows. The full text can be found here. The RBA must use monetary policy to slow demand, because the budgets of the previous Federal Government have contributed heavily to inflation.

There have been varied responses to the rise. The Australian Chamber of commerce and Industry says the last 4 rises have cost the economy (business) $8 billion (in extra profit). For people with a mortgage it is further bad news - their repayments will rise, or they will pay for longer times.

This puts the new Labor Government's commitment to tax cuts in dimmer light. Kevin Rudd says the Government will deliver. I'm not sure the economy can take the cuts, as promised. A fiscally (budget) responsible position would be to delay the tax cuts, or to provide them in a different form - unions want some as extra superannuation contributions from the government. John Howard and Peter Costello pumped ever more spending money into the economy, and caused this inflation. Kevin Rudd is caught between a rock and a hard place: election promise or economic responsibility. I feel a compromise where there will be further cuts to government domestic spending, and most of the promised tax cuts. (So much of politics is about image.)