Budget Critical for immediate future of Interest Rates

One of Australia's leading economists has warned that this year's federal budget must be an extremely tough and tight one if we are to avoid further interest rate rises later in the year.

With the Rudd lead Labor Government already locked into $30 billion in tax cuts, Access Economics director Chris Richardson says the risk of further interest rate rises this year rests significantly on the savings that can be found in next month's Federal budget to be delivered by Treasurer Wayne Swann.

"Right now, with inflation baying at the heels of the economy, one family's tax cut and middle-class welfare is another family's mortgage rate rise."

He says that despite the talk of reining in government spending in an attempt to curb high levels of inflation, the Federal Government has probably added more spend to the budget than it has cut. According to Richardson "decisions so far have tended to add to spending, while outside abandoning Opel's rural broadband roll-out, possible cuts have been the stuff of rumours."

Access lists in its Business Outlook report extra spending by the government on new priority areas such as $1 billion for health and for the Murray-Darling initiative.

There also has been $53 million set aside for an education program on the dangers of binge drinking, and a further $65 million for indigenous affairs, in particular housing, in the Northern Territory.

Mr Richardson says every $3 billion the Government saves could result in a 0.25% cut in interest rates. According to Richardson, "the extent to which mortgage stress stays quite as bad as it is, the Government has in its hands the opportunity to do something about it. So far we haven't seen the tough decisions that we do need to see."

Mr Richardson said that despite the economic indicators, particularly what seems to be decreasing inflation levels, suggesting the Reserve Bank was less likely to raise interest rates again this year, there were still significant risks to the economy."The average punter reading things is not going to be surprised by the thought that the economy could break on the downside," he said. "They might be surprised by the thought ... that the potential for it to break on the upside is at least as great, probably greater.

"There's just as much a chance that the stunning commodity prices getting pumped into Australia's economy will combine with the big tax cuts on the 1st of July to drive the economy faster but also continue to put pressure on interest rates."

Richardson doubts that there will be another interest rate rise next month, but went onto add that the release of the consumer price index data next week could be the determining factor as to whether interest rates will rise in the immediate future or not.

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Published on April 4-st, 2008 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.

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