No guarantee on interest rates: Shorten

Assistant Treasurer Bill Shorten says there’s no guarantee interest rates will drop in light of the government’s banking reforms, contradicting Treasurer Wayne Swan.

In a bid to increase competition in the banking sector, the government recently unveiled a raft of reforms including a ban on mortgage exit fees and a crackdown on banks signalling their rate movements.

Swan said the measures will “build up competition in our banking system, which will ensure that interest rates are lower over time”.

But Shorten has contradicted the claim, stating: “No one can guarantee that interest rates will go down partly because they’re set by the Reserve Bank of Australia and there are always plenty of factors coming into play”.

CommSec economist Savanth Sebastian agrees with Shorten, stating the RBA has a range of factors to take into account such as inflation.

“Even increased competition [in the banking sector] doesn’t mean the Reserve Bank won’t raise interest rates,” he says.

Sebastian doesn’t expect interest rates to rise in the near future because there are several factors restraining the economy such as weak consumer spending and a pullback in the housing sector.

“I don’t expect the Reserve Bank to raise interest rates until April, with two or more [rate rises] in the second half of the year,” he says.

“The key driver is the labour market because this will drive wage growth, inflation and interest rates.”

“The Reserve Bank has already highlighted that some sectors are seeing tight capacity in the labour market, which will only accentuate over the coming year and drive wage inflation.”

“You can expect a good three or four months with interest rates remaining on hold. This will allow businesses to adjust to the rate hikes already in place.”

Sebastian’s comments are in line with the release of the latest Commonwealth Bank Business Sales Indicator, which shows conditions are looking more positive for businesses as they head towards Christmas and the New Year.

The BSI reveals weakness in business sales recorded its smallest decline in 2010, falling just 0.1%.

The report reveals the value of spending transactions fell in only six of the 20 industries in November. In trend terms, the BSI lifted by 0.7% in November; the strongest reading for 15 months.

Retail stores recorded the strongest growth rate in 14 months, up 0.9%, and there was also a 0.4% trend growth at clothing stores; the best reading in 19 months. In annual terms, personal service providers remained on top, up 8.2% on a year ago.

CommSec chief economist Craig James says the latest BSI is “painting a brighter picture” for the economy, providing some relief for retailers.

“All eyes will be on the sector to see if the festive season brings with it some much-needed cheer as we move into the New Year,” he says.