What Will The CPI Tell Us About Interest Rates?

The CPI will be released this week but Ian McAuley isn’t confident that the announcement will be accompanied by rational debate on interest rates

Next week there will be release of the CPI which will as usual stir up debate on interest rates.

Already Tony Abbott is claiming that interest rates will always be higher under a Labor government – a superbly non-refutable statement. In fact, real interest rates are sitting right about where they have sat for a long time, and even if the Reserve Bank puts up nominal rates, real rates won’t have changed. More fundamentally, however, international experience shows there is virtually no relationship between interest rates and budget deficits: those countries with high deficits have low interest rates, because they are the same countries which are trying to stimulate their way out of recession. I assume Abbott’s policy response to the GFC would have been to cut the budget and then try to let permissive monetary policy (low interest rates) stimulate the economy.  Once interest rates are firmly on the campaign agenda next week with the CPI announcement, I’ll address this topic on Thinking Points.