Wednesday, February 21, 2007

Glenn Stevens tells it like it is.

But is that what we expect from Reserve Bank Governors?

Dr Alan Greenspan, the former head of the US Fed once warned an audience: "I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I said." Not so our new bloke.

Did you know, as John Garnaut has reported, he flies a plane?

Below is my report of what he said in tomorrow's Canberra Times, and my analysis, which says he is the real deal...

The head of the Reserve Bank has put Australia’s politicians on notice – the next move in Australian interest rates is likely to be up, and he won’t be afraid to do it in an election year.

Addressing his first meeting of the House of Representatives economics committee the new Governor Glenn Stephens said he wanted to address the “crazy” notion that an “almost unspoken tradition” prevented the bank from pushing up rates in the lead up to an election.

“I have seen a number of references to my predecessor supposedly having said that. I don’t recall that he did say that, what I can recall is that he said that we would not be keen to change them during the month of the election campaign. He also said if it had to be done it would be"...

“I do not accept and I do not think we ever could accept the idea that in an election year, which is one year out of three, we can not change interest rates. I don’t think any central bank could accept the notion that a rate change is off limits one year out of three, that would be crazy,” Dr Stevens said.

Asked whether he we be prepared to push up rates this August after the release of the much anticipated June quarter inflation figures he replied, “if in August if it needs to be done it will be done”. The election is expected in October.

The Governor said he expected Australia’s headline rate of inflation to fall in the months ahead, but the so-called underlying rate, watched by the bank, would remain near the top of its target zone.

“It will probably fall noticeably below 2 per cent on an annual basis as falling petrol and banana prices have their effect. After that, it will rise again as those temporary factors fade and we currently expect that CPI inflation will be around 2¾ per cent by early 2008. That is it appears likely to be lower than recent outcomes, but closer to the top than the bottom of the target range.”

Asked whether that meant that rates were more likely to rise rather than fall, the Governor agreed. “At the moment then the likelihood that some surprising set of events that takes us above the target is higher than the likelihood that you would get a set of events that takes us below. So it flows more or less axiomatically that a rise is more likely than a fall, so, if that’s what you’re asking, then yes, that’s the answer,” Dr Stevens said.

Also in Perth for a Cabinet meeting the Prime Minister said that he was not concerned by the Governor’s remarks and that he was not among those who had been suggesting that rates would fall. “I simply observe that the inflation figure for the last quarter was a good figure for stability in interest rates and I myself have not encouraged the view that rates were likely to fall in the near future. That has not been encouraged by me or any of my colleagues,” Mr Howard said.

The Governor rejected the contention that Australia’s present level of interest rates was too high and creating a housing crisis. He said the problems in housing market were to do with house prices. “The crises that we keep reading about are basically the problems of people that would like to be in the housing market but are not yet there. The real problem for those people isn’t that the rate of interest is high, the problem is that house values are so high,” he said.

On rental housing, the Governor restated his view that rents had to climb in order to get into alignment with house prices.

“The fact is that because of the much higher price for housing around the country the return to the investor for holding that investment is quite low. In the period when the investor was getting a return from price appreciation a low rental yield didn’t seem to matter so much. But it is hardly sustainable, I think, for a major asset market to continually give you most of your return through capital appreciation.”

“Ultimately the running yield, the rental yield has to be higher than it has been, and that’s what’s starting to happen,” Dr Stevens said.

Analysis:


The Reserve Bank Governor says he would be prepared to push up interest rates in an election year if he had to, but would he really?

An interest rate hike – or even a cut – in the lead up to an election is unprecedented.

One of Glenn Stevens forebears in the top job Bernie Fraser waited until just after the election that brought John Howard to power before beginning what was to be a series of six dramatic interest rate cuts, earning the enduring displeasure of the outgoing Prime Minister Paul Keating who could have done with a cut - or a hint of one - before the election.

It was important for Fraser to demonstrate that the Reserve Bank was not, as Keating was said to have claimed, “in his pocket”.

Glenn Stevens has no need to prove anything. After a decade of formal independence and a record of successful management that is envied worldwide, the Reserve Bank now has more credibility than does the Treasurer himself. If Stevens believe that rates need to be moved, he will move them and let the chips fall where they may. People who know him say that’s his style.

In answers to the House of Representatives economics committee yesterday Glenn Stevens didn’t much care who he offended. Renters would have to get used to higher rents, the real problem for home buyers was not high interest rates but high prices (pushed high, he might have added, with the help of the government’s tax policies), the drought wasn’t going to much damage to the economy or push up inflation, and a return to an union-dominated award-based wage-setting system would make his job more difficult.

Central bankers were once said to speak in ways that were hard to understand. Not now, not this one.

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