Fresh controversy over rates

The Federal government’s push to keep interest rates low has received an unexpected boost.

That happened when the ANZ bank’s Chief Executive, Mike Smith, suggested that the Reserve Bank might have moved too early recently, when it raised Australia’s interest rates by 25 basis points.

The Reserve Bank has the power to raise or lower interest rates.

And its board will meet again, on Melbourne Cup Day next Tuesday, to review its present settings.

The Treasurer, Wayne Swan, put the government’s wishes beyond doubt on Wednesday, when he declared that Australia’s inflation is still “moderating.”

Mr Swan based his assertion on the Statistician’s published finding that the nation’s annual inflation rate has dropped from 1.5 to 1.3 per cent.

However, the bureau also reported on Wednesday that Australia’s prices rose by a higher than expected 1 per cent, over the past three months.

This can be seen as a sign that inflation is accelerating.

The Reserve Bank aims to keep inflation in a 2-3 per cent range, over the course of a business cycle.

It manipulates interest rates, to achieve that.

However, it targets what it calls “underlying inflation,”  not the ”headline” figures seen in the Statistician’s Consumer Price Index bulletins.

Mr Swan  noted, too, though that Australia’s underlying inflation rate has also eased, from 3.9 to 3.5 per cent.

The ANZ bank chief said he would have preferred the Reserve Bank to wait until after Christmas before it started raising interest rates.

“I feel that we should really be worrying that the flywheel of the economy has got its own momentum and is moving the right way before we start worrying about inflation,” Mr Smith said.

However, many economists believe that the Reserve Bank will raise interest rates, either by another 25 – or perhaps 50 -basis points, anyway, next Tuesday.

The government, though, clearly wants rates to be kept on hold.

And Mr Smith’s remarks add weight to its views.

The ANZ chief also noted, for example, that the government’s stimulus measures are being slowly withdrawn, as interest rates appear to be rising.

“We have to remember that the stimulus packages are also gradually easing off…” Mr Smith said.

However the Reserve Bank’s Governor, Glenn Stevens, has signalled that his bank might well be in an aggressive mood.

He has said that  it cannot afford to be “timid” about raising rates.

Mr Smith, of course,  will have an interest in the Reserve Bank’s decision, next week.

The ANZ, along with its bigger competitor, the National Australia Ban, has already declared profit cuts this week, that flow from bad debts.

And – presumably – bad debts could keep rising, if interest rates were raised  too steeply, before the Australian economy fully recovers.