Hands off the RBA [Reserve Bank of Australia]

Lower mortgage home loan interest rates are important to homeowners and home buyers and all the industries that rely on them, but is the Howard Government trying to manipulate the Reserve Bank of Australia's decisions on interest rates for politic advantage?
The fine balance of economic power between our elected government, which controls fiscal policy, and the appointed Reserve Bank, which controls interest rates, has never been an easy one and it is certainly not likely to get any easier as economic conditions get more difficult.

But separating politics from mortgage home loan interest rates is one of the best things that has ever happened to the Australian economy.
As the past 15 consecutive years of economic growth provides good testament to, Reserve Bank independence has served us very well and far better than if the Federal Treasurer still had his hands "on all of the levers" as Paul Keating once boasted.

Rather than setting interest rates with votes in mind, the RBA has a simple measure of its success, to encourage a high rate of economic growth without endangering its 2 per cent to 3 per cent inflation target.

By contrast, politics is all about securing power.

When governments had control of interest rates, they were set with votes in mind and the economy second. If there was a line-ball decision to be made, votes won and the economy lost out.

However, it is very clear from the recent comments of the retiring Reserve Bank governor that the road that an independent central bank has to follow is sometimes a rocky one.

Politicians find it hard not to take credit for what the bank does right and to complain bitterly when it does things that they see as impairing their popularity.

Indeed, just a few weeks ago the Treasurer started talking about what "we" look at when "we" set interest rates, implying that he had something to do with it. He does not. Similarly, the RBA governor's recent comments make clear his distress at the Prime Minister's interest rate claims during the last election.

Going into a period of greater economic uncertainty, these pressures are only going to increase.

Already the bank has made it clear the economic stimulus provided by Canberra's tax cuts was a factor in forcing its hand to increase interest rates, in order to offset the inflationary pressures resulting from the tax cuts.

This puts the Government in a challenging position as it is now on notice that further vote buying tax cuts could result in vote shedding interest rate increases.

The last thing our economy needs is for open warfare, or indeed angst behind closed doors, to develop between the RBA and the Government.

One of Peter Costello's best decisions was to formalise the agreement between the Government and the RBA on the conduct of monetary policy.

It is in all our interests that this agreement be honoured in both its letter and intent.

Source: Courier Mail. Tim Hughes is a director of Value Capital Management.