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It's not a bubble-burster, just a switch to normal

Comment by Ross Gittins
November 6, 2003

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If the mug punters still leaping into negatively geared property investments conclude the Reserve Bank is intent on bursting the housing bubble by jacking up interest rates, governor Ian Macfarlane will be well pleased.

The truth, however, is less dramatic. While Mr Macfarlane would be delighted to see a slowing in the rate at which people are borrowing for housing - particularly rental housing - he's unlikely to believe the modest rate rises he has in mind would be sufficient to stop the boom in its tracks.

We can expect another 0.25 percentage point rate increase in a month's time and probably a further one early next year but, on present indications, not much more than that.

Why not? Because interest rates affect the whole economy, not just housing, and you can't screw the rest of the economy just because the property market is overheating.

In explaining his reasons for the increase, Mr Macfarlane was at pains to point out that some degree of tightening - and more than a measly 0.25 of a percentage point - could be justified by the state of the general economy, without reference to housing.

Interest rates are a lot lower than we got used to in the 1980s and early '90s, and they're going to stay well below double figures.

For the past year or two, however, they've been lower than the new version of normal. Why? To give our economy a bit of extra boost while the United States economy and the whole world economy were so weak and, more recently, while the rural sector was hit by severe drought.

But over the past few months it's become increasingly apparent that the US economy is back on its feet and the world economy's looking stronger.

At home, the drought has receded in many parts of the country, unemployment is as low it's been in two decades and consumer spending and business investment are growing strongly.

Clearly, the justification for keeping interest rates "on special" has evaporated and the prudent course is to put them back up to normal, so we don't over-stimulate the economy and end up going too fast.

To use an old metaphor, Mr Macfarlane isn't putting his foot on the brake, he's just taking it off the accelerator.

That's why rates won't rise by much. It's also why a bit of a rise is actually a good sign - it means the authorities are confident the prospects for the economy are bright.
