verging_on_random

Historically low?

November 9, 2006 on 4:31 pm | In Uncategorized |

Few topics bore me more than interest rates. Being fortunately free of debt and unfortunately equally free of cash, interest is not a matter of practical concern for me. The recent obsession with interest rates in the media is just plain tedious, especially when 90% of it consists of self-appointed experts predicting what interest rates will do in future or the interest rate implications of any conceivable news story. I suspect news editors have a standard template for major stories:

1. 15 second summary of facts
2. 15 second talking economist saying what it means for interest rates
3. 30 second doorstop with John bleedin’ Howard asking what it all means.

Anyway be that as it may, interest rates have become a mandatory part of contemporary political discourse. Significantly, not many people care about the level of interest rates (be honest, can you say without looking what rate applies to your mortgage? To your credit card?). The important thing is whether they are going up or down or staying the same.

The Prime Minister keeps using interest rates to bludgeon Labor. He takes every opportunity to remind people that interest rates reached over 17% for a short period under the Hawke/Keating Government (neglecting to mention that they got even higher, for a short period, under the Fraser/Howard Government). Somehow he uses that to argue that ‘interest rates are always higher under Labor than under the Coalition’. No he doesn’t explain his logic, it’s part of the man’s genius to be able to say things like that without embarrassment. If Kim Beazley said that unemployment will always be lower under Labor than the Coalition he would rightly be howled down with cries of “Show us your evidence” but somehow John Howard can get away with it (Ross Gittins from the Sydney Morning Herald honourably excepted).

Howard presumably realises that it’s a bit shaky relying on an unprovable proposition so he’s bolstered his interest rate credentials with an impressive statement of fact. According to him, interest rates under his government are at ‘historic lows’. So that has to be true, right? You wouldn’t even bother going to check. But I did because I was bored. And you know what?

It’s not even remotely correct.

If you go here, you can find the Reserve Bank figures for a series called ‘Mortgage Managers - Lending - Housing Loans - Indicator Lending Rates - F5‘. They reveal that for the period from 1959 to 1969, the standard bank mortgage interest rate averaged 5.3% and never once exceeded 6%. From 1996 to date they have averaged 6.6% and never dropped below 6%. In other words, home mortgage interest rates have been significantly higher under the Howard Government than they were for the first 10 years for which the RBA publishes figures on its web site (I’m sure you could get earlier figures if you looked but hey, this isn’t an economics paper). The point is that there’s nothing ‘historically low’ about current interest rates. People who bought new homes in the 1950s would have been horrified by them.

So how would Howard justify his claim? I suspect he’d say ‘official RBA interest rates’ now are lower then they ever were under Labor. Which is true. But since the RBA only began to fix official interest rates in 1990, saying rates under his government are the lowest on record is a pretty meaningless observation.

Throwing interest rates around is a pretty pointless exercise, by themselves they prove nothing and serve to confuse issues rather than clarify them. Japan for example had interest rates of 0% until quite recently but nobody thought that was a good thing. The reason I mention them is to demonstrate firstly how our PM is quite happy to make misleading statements to impress the voters, and secondly how so few people bother to correct him; not even the opposition, because on interest rates he’s got them bluffed.

If you care about the impact of indebtedness on Australians then this is the information you need to consider. The proportion of income that households pay out in interest started to increase in the mid 1980s. It was -1.7% then (in other words, interest received on savings was greater on average than interest paid on loans) and it’s been going up ever since. It currently stands at over 5%.

Putting this in perspective, in 1985 the average household earned $1.70 in interest for every $100 of disposable income. In 2006, they paid out more than $5 interest for every $100 disposable income. Well at least now I know why interest rates have become such a media obsession.