Wednesday, December 05, 2007

Ever wondered what's going on inside the Reserve Bank's walls?

Fear of worldwide economic turmoil has forced the Reserve Bank to put on hold its plans for a further hike in Australian interest rates.

The Bank yesterday broke with tradition and made public the reasoning behind its decision at Tuesday's board meeting not to lift rates, saying in future it would do so after each of its monthly meetings whether or not it decided to move rates.

It also said that beginning immediately it would make public the minutes of each of its board meetings, opening its decision-making process to an unprecedented level of scrutiny.

The Bank's Governor Glenn Stevens, in the job for just over a year, announced the decision after consulting with his new Treasurer Wayne Swan...

Mr Swan said he had a long discussion with the Governor about the moves last week and had offered him complete support.

The minutes for the November board meeting made public yesterday indicate that indicate that at the mid-point of the election campaign board members were becoming increasingly concerned about the rate at which election promises were eating into the projected budget surplus.

The minutes say that a surplus of 2.5 per cent of GDP had been in prospect but that “new expenditure and revenue measures announced since the budget and in the early part of the election campaign had since reduced the projected surplus to around 1 per cent of GDP”.

They conclude that the tax and spending promises had roughly “offset the automatic fiscal stabilisers” meaning that the government had offered the Bank no help in fighting inflation.

Mr Swan said that his government by contrast would help, and declared tackling inflation to be his number one priority.

But he defended matching $31 billion of the Coalition's $34 billion of promised tax cuts during the election campaign saying they would add to productivity.

He said he had become aware of information that suggested that the former Treasurer Peter Costello had tried to “lean on” the Treasury in its preparation of the pre-election financial accounts but he said the Treasury had told him that that the accounts were nonetheless accurate.

The documents released by the Bank indicate that its view about the global economic outlook changed dramatically between its November and December board meetings.

The minutes for the November meeting at which it decided to push up rates portrayed the outlook as benign forecasting that although worldwide growth would slow it would remain “still well above the average of the past three decades”.

The report of this week's December board meeting said that “global financial turmoil” had shaken market sentiment and that growth could fall to little more than the long-run average.

It said that in Australia pressure from the turmoil had been less pronounced than elsewhere but that borrowing costs had risen and that further increases were likely.

In an apparent nod of approval to banks who might want to pass on higher borrowing costs to consumers as the Adelaide Bank did this week to its mortgage customers it said that such moves would take pressure off it to increase official interest rates.

The Treasurer Wayne Swan backed up the Bank saying that while he would “certainly urge all of the banks to think carefully before they raise rates again” such decisions were commercial ones for the banks and that the Governor had “outlined, I think very accurately in his statement today, the commercial environment”.

On Monday the Adelaide Bank lifted all of its standard variable and low-doc mortgage rates by 0.25 percentage points, adding an extra $800 to the annual cost of servicing a $400,000 loan.