Saturday, February 21, 2009

Good times could be just around the corner. Really. In the view of Governor Stevens.

And who is going to argue with our Reserve Bank Governor?

His building, and the Treasury - which is even more optimistic - house some of the best economic brains in the country.

Also below, the Governor's thoughts on

. heavying bank CEOs over lending to business
. an entire redesign of monetary policy
. upfront charges for the use of ATMs

The full transcript of the marathon interegation is
here


RESERVE Bank governor Glenn Stevens has defied the doomsayers and predicted that Australia's struggling economy will begin to recover in the second half of this year.

Although next month's national accounts are expected to show negative growth, Mr Stevens believes it will begin to rebound within months and says Australia's key customer, China, may already be emerging from its slump.

Governor Glenn Stevens' surprisingly upbeat assessment of Australia's prospects delivered to the parliament's economics committee saw financial markets back away from predictions of further interest rate cuts and pushed up the dollar.

"There aren't indications of recovery yet, that would be a bit soon," Governor Stevens told the committee.

"But I would expect that after just a little while that households who are in a reasonable financial situation will want to borrow more, and we will see that flow through into the housing sector."

"Loan approvals are already climbing...

I think they will continue climbing and that will have an impact later in the year - not yet - on demand for construction of new dwellings."

"At the moment it's contracting, but I think it will probably bottom out and start to pick up later this year."

His remarks were backed up by ANZ chief executive Mike Smith who separately told the American Chamber of Commerce he thought Australia might - just - escape the consecutive quarters of negative growth taken to define a recession.

"Last February I said it was a bloodbath out there, armageddon. I want to again buck the trend and say I have renewed optimism. Australia's downturn may not be as deep and as protracted as many now fear."

Reserve Bank Assistant Governor Malcolm Edey told the parliament's committee there were "tentative" signs China's economy had bottomed.

"Although there was a very sharp reduction in all indicators in the December quarter, China's industrial production appears to have stopped falling in the last month or two."

"These are tentative signs and the numbers are volatile," he said.

Stevens said he was optimistic about China, and as a result optimistic about Australia over the long run.

"What has happened is a reminder that China has business cycles like all of us. It was never going to grow at 12 per cent a year the way it did until recently. It seems to me still the case that the emergence of China as a large industralised economy has years and years to run. It will be a volitile ride on occasions, but Australia has potential to benefit over the long run as we did over the last couple of years."

The Governor's optimism did not extend to Japan whose performance he said would drag Australia down.

He credited the government's two economic stimulus packages and the
Bank's aggressive rate cuts with the expected recovery, saying he expected half of each package of stimulus payments to be spent.

"Even if people save more than that it just means that the balance sheets of households improve a bit faster than we thought which means that some way down the track households are likely to resume spending in a stronger way a bit quicker," he said.

Asked by the Coalition's Treasury spokesman Joe Hockey whether there were dangers in going "too hard, early" with stimulus measures, Mr Stevens replied that he saw greater dangers in waiting.

"It may be that the longer you wait, the more ammunition you'll end up needing to use, because these things can get a sort-of self-fulfilling momentum behind them and you should try to head that off if that's possible," he said.

Governor Stevens defended the government guarantee of bank deposits introduced in October rejecting reports that he had opposed it.

"I think in the circumstances we faced where you had governments around the world having to do this, where you had people starting to ring up radio and TV shows asking whether they should take their money out of Australian banks, you don't want to let that run. You have to act, and the sooner you act the better."

"It was obvious ahead of time that whoever isn't guaranteed isn't going to like it, but you can't guarantee everyone, you have to preserve the core of the system."

"Yes, there were some boundary issues. I appreciate that many people found that upsetting, but now we see the banking system retains the confidence of the austrlaian public, we never got the queues in the street, but you don't want to go near that," the Governor said.

While Treasurer Wayne Swan had no comment to make about the Governor's relatively upbeat assessment, his opposite number Joe Hockey took the opportunity to thank him for the way he handled the economic crisis.

"It has been a challenging time for Australians and we are very lucky that even though we might not always agree with what the Reserve does, we appreciate your professionalism" he said.

"There aren't indications of recovery yet, that would be a bit soon," Governor Stevens told the committee.

"But I would expect that after just a little while that households who are in a reasonable financial situation will want to borrow more, and we will see that flow through into the housing sector."

"Loan approvals are already climbing. I think they will continue climbing and that will have an impact later in the year - not yet - on demand for construction of new dwellings."

"At the moment it's contracting, but I think it will probably bottom out and start to pick up later this year."

His remarks were backed up by ANZ chief executive Mike Smith who separately told the American Chamber of Commerce he thought Australia might - just - escape the consecutive quarters of negative growth taken to define a recession.

"Last February I said it was a bloodbath out there, armageddon. I want to again buck the trend and say I have renewed optimism. Australia's downturn may not be as deep and as protracted as many now fear."

Reserve Bank Assistant Governor Malcolm Edey told the parliament's committee there were "tentative" signs China's economy had bottomed.

"Although there was a very sharp reduction in all indicators in the December quarter, China's industrial production appears to have stopped falling in the last month or two."

"These are tentative signs and the numbers are volatile," he said.

Stevens said he was optimistic about China, and as a result optimistic about Australia over the long run.

"What has happened is a reminder that China has business cycles like all of us. It was never going to grow at 12 per cent a year the way it did until recently. It seems to me still the case that the emergence of China as a large industralised economy has years and years to run. It will be a volitile ride on occasions, but Australia has potential to benefit over the long run as we did over the last couple of years."

The Governor's optimism did not extend to Japan whose performance he said would drag Australia down.

He credited the government's two economic stimulus packages and the
Bank's aggressive rate cuts with the expected recovery, saying he expected half of each package of stimulus payments to be spent.

"Even if people save more than that it just means that the balance sheets of households improve a bit faster than we thought which means that some way down the track households are likely to resume spending in a stronger way a bit quicker," he said.

Asked by the Coalition's Treasury spokesman Joe Hockey whether there were dangers in going "too hard, early" with stimulus measures, Mr Stevens replied that he saw greater dangers in waiting.

"It may be that the longer you wait, the more ammunition you'll end up needing to use, because these things can get a sort-of self-fulfilling momentum behind them and you should try to head that off if that's possible," he said.

Governor Stevens defended the government guarantee of bank deposits introduced in October rejecting reports that he had opposed it.

"I think in the circumstances we faced where you had governments around the world having to do this, where you had people starting to ring up radio and TV shows asking whether they should take their money out of Australian banks, you don't want to let that run. You have to act, and the sooner you act the better."

"It was obvious ahead of time that whoever isn't guaranteed isn't going to like it, but you can't guarantee everyone, you have to preserve the core of the system."

"Yes, there were some boundary issues. I appreciate that many people found that upsetting, but now we see the banking system retains the confidence of the austrlaian public, we never got the queues in the street, but you don't want to go near that," the Governor said.

While Treasurer Wayne Swan had no comment to make about the Governor's relatively upbeat assessment, his opposite number Joe Hockey took the opportunity to thank him for the way he handled the economic crisis.

"It has been a challenging time for Australians and we are very lucky that even though we might not always agree with what the Reserve does, we appreciate your professionalism" he said.


Riding shotgun on business lending

Reserve Bank Governor Glenn Stevens has been personally lobbying the heads of Australia's banks to reign in zealous behaviour by their lending officers.

In evidence to the parliament's economics committee Friday Mr Stevens said he believed that in no banks had an edict has come down from the board or the CEO to say, "let’s get tough on business," but he said he was worried that lending officers would be tempted to get tough in in order to keep their jobs.

"The CEO will not be saying ‘Get tough on these guys,’ he told the committee.

"But the phenomenon one would like to see them try to guard against is the one where the lending officers at the coalface do not need to be told to be more cautious because they fear for their own job if they make a bad loan. It is human nature."

"In my private conversations with bankers I say, ‘Make sure they don’t overreact.’ That is the credit crunch that you do not want to have," he said.

The Governor acknowledged that "on any given set of objective credit standards" there might be fewer borrowers acceptable than there would have been a year ago".

"That's because the economy has slowed. It is inevitable that the credit worthiness of some of the borrowers is going to deteriorate. That's normal."

"We are also aware that banks are looking at the pricing of facilities as they roll off. You might have a facility that is in place over a period of years and eventually it ends and you then sit down to negotiate new terms, that is inevitable."

"The key thing is for the banks not to overdo that."

Deputy Governor Ric Battellino said that unlike in some other countries, Australian banks were at least continuing to lend to businesses.

"In a lot of countries the banks will not lend. In Australia it has not been a problem. Our four major banks, particularly, have continued to lend very strongly to the corporate sector," he assured the committee.

Asked why banks hadn't fully passed on the Reserve Bank's cuts to businesses in the same way as they mostly had to mortgagees Mr Stevens said," frankly they have not been under quite the same public pressure on those rates as they have been on housing rates".

"That is probably not the whole explanation but it may be part."

He confirmed that the special purpose vehicle set up to provide finance to car dealerships had so far been "tapped very little if at all so far".

But he said it was "probably sensible to have thought about what you might do if there were a sudden withdrawal of funding from a sector and to have that ready in case".

To be clear, I did not think that plan was about just holding up the values at some particular level; I thought it was about avoiding a set of fire sale prices. If the prices really are too high they will come down, and you cannot stop that, actually. But I think it is about avoiding a fire sale sort of situation.


Rethinking why rates are pushed up

The Reserve Bank has flagged the possibility of rewriting its contract with the government in order to avoid the next asset bubble.

While making clear that his immediate priority was dealing with current problems, Assistant Governor Philip Lowe told the parliament's economics committee that the bank might need to ask for a change its guidelines in order to better deal with "the next cycle of fear and greed".

"In various international groups that we are involved in these things are already under discussion," he told the committee.

The present guidelines require the bank to keep the underlying rate of inflation to an average of 2 to 3 per cent over the economic cycle.

Dr Lowe said the bank would need to consider extending them to also target asset prices, even where inflation was low.

Governor Stevens said the target should be leverage.

"My guess is that if you have an asset bubble in, say, some new exotic art, and there is no borrowing, it is not going to do a lot of damage to the economy."

"It is the bubble where you have leverage and then the collapse happens — the borrower is under water and then so is the lender — where you have a big problem."

"Should we lean into that bubble with tighter monetary policy, even though that would mean slower growth and inflation below target? We are debating that at great length. Should we do both, and how would we explain it?"

"It's not easy to do."


Why using a foreign ATM is cheap

The Reserve Bank has put a figure on the cost - to banks - of letting a customer from another bank use one of their automatic teller machines.

The service for which banks have charged each other and their customers more than $1.00 actually costs the bank "no more than 10 cents".

"On our estimates it would be at most 10 cents, and quite possibly a lot less, to do the electronic processing of sending the signal along the wire and back to square up the accounts. We see no logic for there being a so-called foreign user fee, certainly no more than that much," Bank Governor Glenn Stevens told the parliament's economics committee.

Under new rules due to start on March 3, banks will no longer be able to charge each other for the so called "foreign" customers who use their ATMs but will be able to charge foreign users directly on the condition that they make the charges clear before the transaction is made.

Some ATM owners are reportedly planning to charge as much as $2.50 for a balance inquiry and $5 per withdrawal. In addition some banks are considering "disloyalty fee" for customers who use rival ATMs.

Governor Stevens said he was powerless to stop such charges but hoped that competition would bring them down.

"Our approach has been to make as explicit and transparent as possible what is really going on here, and it never has been transparent. That itself is a big step because it puts the spotlight on what fees are reasonable and what are not," he told the committee.

"I think information brings that empowerment. Whether or not it is enough to get rid of fees I do not know, but that is as good as I can do for you at the moment."

5 comments:

Anonymous said...

Peter, even you should appreciate the Governor of the RBA is not a neutral commentator. He has huge skin in the game to be positive when things are bad and gloomy when they are gangbusters. If he can talk the market to neutral, it is better than pulling the levers of monetary policy.

Peter Martin said...

Dear Anon,

Two points.

1. I actually think Glenn Stevens is calling it as he see it, rather than inventing an expected recovery later this year to talk the economy up. That's my view, based on my assessment of him and his colleagues over a long time.

2. When I write news stories for The Age, my opinion doesn't matter. I just put on the record what they say.

Anonymous said...

A central bank Governor who merely says optimistic things simly to be optimistic loses credibility

Anonymous said...

Peter,

Don't you think he's being a little optimistic on China? Most of the indicators are still bad, and the "good" ones look very much like manipulation by government.

Not to mention, Japan's crunch (our biggest export market) might have a heavier effect on us than any China rebound.

In my opinion, he is trying to avoid criticism against raising rates into the teeth of the subprime crisis.

Anonymous said...

So RBA and Treasury have some of the smartest guys in the room?

That's reassuring.

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