Friday, June 26, 2009

'Foot above the accelerator, not the brake'


In a generally positive assessment of the Australian economy the International Monetary Fund has implored our Reserve Bank to be "more cautious than normal" when deciding whether to tighten interest rates, describing international conditions as "fragile".

The Fund has backed an OECD forecast that this year's downturn will be milder than predicted in the Budget and next year's recovery stronger.

Whereas two months ago the IMF was expecting the Australian economy to go backwards 1.4 per cent in year-average terms in 2009 it now expects a contraction of only 0.5 per cent. Whereas it was expecting an anemic recovery of 0.6 per cent next year it now expects 1.5 per cent.

Treasury Secretary Ken Henry yesterday confirmed that he too expected growth to be "somewhat stronger" than forecast at Budget time...

...but that it was "too early" to upgrade the budget figures.

"It may be that there is some upside to our forecasts, but really it is too early to tell,'' he told local government representatives in Canberra.

The IMF has given the green light to further government stimulus packages if needed saying Australia has more "fiscal space" than most countries to boost its economy and is one of the very few to have mapped out a plan to return to surplus.

"If additional fiscal stimulus is deemed necessary, our analysis suggests that the impact on growth is highest for public investment spending," the consultation report says. "Transfers targeted to low-income households have a faster yet still large impact, and could be the most appropriate measure if a prompt demand impetus is required."

But report says the IMF would prefer interest rate cuts to stimulus spending "as the first line of defence," and asks the Reserve Bank to be "more cautious than normal in tightening," saying a lift in rates can wait "until there are clear signs that a sustainable recovery is underway".

Both Westpac and the Commonwealth Bank yesterday penciled in rate hikes next year nevertheless after at least one further rate cut this year. Westpac expects the Reserve Bank to cut its cash rate from 3.0 per cent to a low of 2.50 before tightening, the Commonwealth to 2.75 per cent.

Financial markets are pricing in a 4.0 per cent cash rate by next August, a full one percentage point higher than at present, implying a rebound in the standard variable mortgage rate to around 6.75 per cent.

The Roy Morgan consumer confidence index yesterday jumped to its highest level since February 2008 and the Investment & Financial Services Association's investor confidence index to its highest point since August 2007.

Published in today's SMH and Age


carbonsink said...

No more stimulus in China

Looks like the much vaunted consumer-led recovery in China ain't happening either...

People's Bank of China survey results released in early June show that with the reduction in people's income and the expanding uncertainty of future revenue, urban residents are becoming more cautious in their consumption and the urge to save has become stronger. The government fears that over-prudent consumption will hinder domestic demand increase.

So where's all this growth coming from Pete? I know you're glass half full guy, but this is getting silly.

Anonymous said...

IMF can sleep well. Maintaining an interest rate schedule that bears no resemblance to reality and ignores inflation is the RBA’s speciality.

The RBA has a target range of say 3% inflation. If inflation becomes apparent in the economy, do not worry, RBA will be unlikely to notice.

Look at the record RBA in managing inflation from 1994 to 2009.

Private debt to GDP ratio doubled from 80% to 160%. This surge in debt was linked (in part) to the easing of lending standards. The principal destination for most of this debt was the housing market (now about $1Trillion). This debt was fuelled by the banks that went on a lending spree at an average compounding rate of 15% per annum (1998 to 2009). During the same period national economic growth was less than 3% with debt stripped out*.

One question remains, how did monetary policy fall into the hands of the banks?

Shouldn't that be responsibility of RBA?

Answer, the RBA and the ABS decided to play a little game of ‘Hide-the-inflation’.

The ABS decided to exclude land price fluctuations from the CPI calculations, and the RBA pretended not to notice. This last decade of inflation according to the RBA calculations was about 35% (CPI over 10 years). House price inflation for the same period is more or less 300%. Bingo, a housing bubble.

Once upon a time (2008): "In the April edition of its World Economic Outlook, the IMF argues that Australia’s property market is the fourth most vulnerable in the world to a painful price correction.
. . increases in house prices between 1997 and 2007 are not explained by corresponding increases in the drivers of sustainable house price growth such as higher incomes or low interest rates. It found the gap between house prices and underlying value fundamentals is close to 25% in Australia, with only the housing markets in Ireland, Netherlands and the United Kingdom in a worse condition.”

Message to IMF: RBA is asleep to the real inflation in Australia, tell them whatever you like. The RBA seems incapable of research into how to track inflation in the economy, you will need to guide them.

*Dont Mention the Debt 19Feb09 The Age:

naturoo22 said...

Whatever the RBA does is becomming a irrelevant. Our banks ignore the wishes of the reeserve and price their products on their own metrics rather than follow the RBA and this point to one of the big issues. The RBA is a follower not a leader.

As the comment above pointed out banks create money through selling debt, therefore they control inflation.

Until Gov has the balls to take control of whats left of the fractional reserve system and the creation of debt money the RBA will be a source of press releases and not much else.

Anonymous said...

RBA & inflation - the royal connection.

Given the fact that actual inflation has been racing along at over 12% (include land component of cost of living in CPI) one could say the RBA has royally made a dog’s breakfast of keeping a lid on inflation.

Would like to hear the RBA’s “thinking and actions on monetary policy” – why has the RBA ceded control of monetary policy to commercial banks? Is there a conflict of interest in all this?

The RBA seems to have become some kind of amorphous think-tank where no one accepts responsibility for inflation of over 12%. As luck would have it, “There are no explicit penalties imposed on the RBA should inflation move outside the 2 to 3 per cent range.” Plainspeak: whatever.

No, the penalties are imposed on wage and salary workers as rampant inflation devalues labour. Meanwhile, the unions sleep on, dreaming of how they can ‘help’ their members and society probably. Well intentioned but . .

Anyone out there with ideas on how to remedy this situation for the benefit of our socio-economy?

Post a Comment