Monday, October 22, 2007

TUESDAY COLUMN: The building that houses the key to the election

Across the road from Westfield Belconnen lies a building that houses the key to the federal election.

A small number of staff at the headquarters of the Australian Bureau of Statistics already know the size of the September quarter consumer price index due for release on Wednesday, and more particularly the size of the so-called “trimmed mean” that the Reserve Bank will use to help it decide whether to put up interest rates on Melbourne Cup day two weeks later.

Don’t doubt for a moment doubt that the Reserve Bank will push up interest rates the day after its Melbourne Cup day board meeting if the trimmed mean turns out to be high...

People who think that the Bank would hold off for a month in deference to the Prime Minister’s election campaign (and even some private sector economists think this) don’t understand the Bank, its board or its Governor Glenn Stevens.

Glenn Stevens told a parliamentary committee ten weeks ago that “if it is clear that something needs to be done, I don’t know what explanation we could offer the Australian public for not doing it - regardless of when an election might be due.”

He said that knowing that he had the the members of his board behind him. They include Australia’s most successful retailer Roger Corbett, the Telstra Chairman Donald McGauchie, the ANU’s Professor Warwick McKibbin, and Dr Ken Henry who heads the Treasury.

As they see it, any decision not to act at their next meeting if the case for action turns out to be clear would itself be an unconscionably political act.

With five Orders of Australia between them, the nine members of the Reserve Bank board are not going to take any decision that would ruin their reputation for doing what is right given the information available to them at the time.

In two decades years of observing the Reserve Bank board I have never seen an instance of a member putting his or her political or commercial coonsiderations ahead of taking the right decision in the interests of the nation.

(Which is particularly impressive given that political and commercial considerations often seem to have been a criteria for appointment. The big Liberal donor Rob Gerard and the former head of Coles Myer and later convicted criminal Brian Quinn are examples).

It is as if on entering the Reserve Bank the board members leave their personal interests behind them, in much the same way as have former trade union officials on becoming government ministers.

Right at the moment the Reserve Bank board is even less likely than normal to be concerned about the political or commercial implications of hiking rates.

For two reasons.

One is that is that its members have fewer outside considerations than normal. Roger Corbett is the former, no longger the current, head of Woolworths; Donald McGauchie is at war with the Howard government as Chairman of Telstra and Ken Henry is able to attend the November board meeting unusually free of whatever loyalty he normally owes to his boss Peter Costello. With Australia's government in caretaker mode Ken henry is for once completely free to vote and speak at the board as he sees fit.

The other reason that the Reserve Bank board will focus on its job, not on politics is that Australia's inflation outlook is dire, and delaying pushing up rates if that should prove to be necessary could have disastrous consequences.

Here's the maths, as already calculated but not yet revealed by the statisticians at Belconnen.

Every three months its teams of “shadow shoppers” visit thousands of shops and service providers to get a fix on the cost of a group of very specific purchases.

For bread, they write down the price of a 650 gram sliced white loaf; for butter a 500 gram block; for coffee a 150 gram jar, and so on.

The percentage that each price has gone up (or down, as sometimes happens) helps it work out the quarterly rate off inflation.

Particularly important in working out the rate are some things not sold in shops - rents, which have taken off in recent months, and petrol, which jumps around a lot from month to month.)

The published headline rate (which last time was 1.2 per cent for the quarter and 2.1 per cent for the year) gets most of the attention. Last time the Treasurer and the Prime Minister latched on to it because it seemed to show that inflation was safely within the Reserve Bank's target band of 2 to 3 per cent.

But the Bank itself pays much more attention to other less publicised rates, also calculated by Bureau to its specifications. One is the so-called trimmed mean. The wizards in Belconnen discard those prices that have moved up the most and those that have moved up the least, examining only the middle 70 per cent. There movements unlikely to be unusual – they represent underlying trends.

The last trimmed mean, released in July was alarming. Prices had jumped 0.9 per cent in three months - which may not sound like a lot, but if if continued it would result in an annual inflation rate of 3.6 per cent, well beyond the Reserve Bank's target.

Especially alarming was that in the two previous quarters the trimmed mean had been only 0.5 per cent, suggesting that inflation had taken off.

Another quarterly trimmed mean of 0.9 per cent as many experts expect will confirm that suspicion.

Waiting before taking action to restrain inflation (in deference to the Prime Minister's choice of an election date) would risk a third successive quarterly rate of 0.9 per cent and defeat in the Reserve Bank's battle to keep inflation within its target band.

There is a chance the quarterly trimmed mean inflation rate due for release tomorrow will be even greater than 0.9 per cent. The so-called Producer Price Index released by the Bureau yesterday suggests that that is a possibility.

If the quarterly trimmed mean comes in at 1.0 per cent, an interest rate hike in November is certain. If it comes in at 0.9 per cent a hike is highly likely.

Only a rate of 0.7 per cent or less will calm the board, and there are few signs of one.

The trimmed mean is already known within the ABS complex in Belconnen. The document will be printed there this morning.

A high figure will toll the bell for the Howard government. A low figure will leave it with a chance.