Rate That Stops A Nation

Sydney Morning Herald

Wednesday November 7, 2007

Phillip Coorey, Jacob Saulwick and Jonathan Pearlman

JOHN HOWARD faces his toughest credibility test of the election campaign this morning with the Reserve Bank expected to raise interest rates by 0.25 percentage points - and the news will be compounded for many credit card holders.

While financial markets put the likelihood of another official rate rise at 92 per cent, the rates on some credit cards have already been lifted by 2 percentage points since August. That is eight times the Reserve's last increase in the official rate in the same month.

The Prime Minister, who campaigned successfully in 2004 by promising to keep rates low, was urging voters to stick with the Coalition yesterday as the bank board met and contemplated what would be the sixth successive rate rise since the last election.

The Treasurer, Peter Costello, urged voters to remember interest rates had been cut 19 times under the Coalition and had gone up on 15 occasions and they were still lower than at any time under the previous Labor government.

"And that's during a period when the Australian economy has grown in its longest period of expansion, and unemployment has fallen to 33-year lows," he said.

Labor's shadow treasurer, Wayne Swan, said Mr Costello failed to mention that rates had risen nine times in succession since May 2002.

"Apart from showing he clearly isn't prepared to take any responsibility for the Government's misleading promise, Mr Costello's comments show he doesn't have a clue about the impact of rising interest rates on household budgets," Mr Swan said.

The announcement will be made at 9.30am. Borrowers with hefty credit card bills can expect to cop the full brunt of any rate rise and more, with lenders eager to recoup losses made in the turmoil of global money markets.

Figures from more than 100 credit cards show a widespread move to increase rates above official rate rises.

For cards used for purchases, there has been an average rise of 0.34 percentage points since the last rate rise. This is 0.09 percentage points higher than the Reserve's 0.25 percentage point increase, figures provided by the research firm InfoChoice show.

The gap is bigger on rates for cash advances, which have risen an average 0.47 percentage points.

The average credit card debt is $3000 and the total value of purchases and cash advances was $18 billion in August.

The general manager of InfoChoice, Denis Orrock, said a number of companies had been keeping credit card rates steady during the recent run of interest rate rises, in part because they had invested in large billboards advertising low rates. "But when you see cards with already high rates increasing them further you think, what's going on? Credit card rates give true meaning to the word variable," he said.

Economists overwhelmingly are forecasting rates will be increased today in an attempt to dampen underlying inflation, which is running at 3 per cent.

A rate rise would lift the official cash rate to 6.75 per cent and the standard variable mortgage rate to 8.55 per cent, its highest in a decade. It will add about $17 to the monthly mortgage repayments for every $100,000 borrowed. It would also be the first time they have risen during an election campaign. Some lenders could increase rates by more than any official increase.

Mr Howard has said strong economic growth, the drought and high world oil prices would be responsible for any rise today as he distanced himself from direct responsibility.

Yesterday he seized on the economic fallout in the United States from the subprime mortgage market meltdown as another reason people should not vote for Labor.

He singled out the resignations of the Citigroup chairman, Charles Prince, and Merrill Lynch chief executive, Stan O'Neal, after their banks reported heavy losses.

"This has ramifications around the world," Mr Howard said. "We have a strong economy but events around the world and some domestic events are presenting new challenges."

He was also forced on the defensive after comments by a backbencher in a key marginal seat who sought to portray today's expected rate rise as a boon for the Coalition.

Mr Howard rang the Queensland MP Cameron Thompson after he was reported as saying a rate rise would have a positive impact on the campaign.

"I'm saying that I think that what it does is underline the strong economic performance of this Government and to that extent if you want to draw a political line under it, it's a positive for the Government," Mr Thompson told Brisbane's Courier-Mail.

Mr Howard said he rang Mr Thompson, who holds the Brisbane seat of Blair, and "he has told me what he said and he didn't say that".

However, the newspaper subsequently produced a tape recording of his comments.

Mr Rudd said Mr Thompson's comment underscored the Coalition's political cynicism.

"The Government is seeking to make political advantage out of something which obviously hurts working families and I think that stinks," he said.

"Their language suggests that their primary objective is how to win political power at the next election, not the impact on working families."

Mr Rudd has accused the Coalition of "running up the white flag on inflation" by suddenly claiming it was beyond its control while neglecting over the years to combat the contributing factors.

The Coalition's election slogan is "Going for Growth" but growth is one of the factors Mr Howard is citing for today's expected rate rise. He said the two were not incongruous.

"We can have growth in the Australian economy provided we have the right policies."

© 2007 Sydney Morning Herald

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