Wednesday, February 17, 2010

The worst of the rate rises are behind us?

We'll hear more from Governor Stevens Friday

The Reserve Bank has reached a pivotal point in its program of rate rises, declaring the bulk of the work behind it.

After three successive rate rises at the end of last year the board's February minutes say rates are "no longer exceptionally accommodative," merely remaining "somewhat below average".

The minutes say future rate rises will be decided on a case-by-case basis depending on economic indicators each month.

Board members no longer "regard the outlook as requiring an increase at every meeting"; they believe rate rises to date have given them "a degree of flexibility" in future decisions.

While good news for mortgage holders the declaration means future rate rises will become politically charged, being painted by the Bank as responses to current conditions rather than the withdrawal of emergency settings.

Asked at a Women in Finance lunch in Sydney whether future rate adjustements would be linked to attempts to wind back government spending Reserve Bank Assistant Governor Guy Debelle ducked the question...

"I can guarantee that there will be at least three hours of questioning on this topic on Friday when the Governor appears before the parliamentary committee, where they will spend three hours trying to get him to answer this question in some way or the other," he said.

"In the interests of not pre-empting Glenn, I think I'd prefer to leave that question to him."

At a closed Reserve Bank anniversary function last week Governor Glenn Stevens painted a picture of "a lengthly period of rather low short-term interest rates" if governments committed themselves to repairing their budgets.

But he prefaced his remarks by saying they were "not intended to provide any particular message about current issues for monetary policy in Australia".

It is understood he will tell the parliament's economics committee Friday that he had in mind other countries with much bigger needs to cut spending than Australia when he linked rates to government spending, and that any linkage in Australia would be small.

Shadow Treasurer Joe Hockey told the Press Club Tuesday the bottom line was "the Government can reduce the upward pressure on interest rates by cutting its spending, but it chooses not to".

However when asked whether he would tighten spending further than the government which has promised to cap real spending growth at 2 per cent per annum once economic growth recovers, he replied he would not.

"I accept the framework the government has put in place where it says it will put the cap in place when we get to trend growth," he said.

"I accept that framework. What I have a problem is the other end of it. My concern is as soon as we go into surplus under the Labor Party’s framework, that 2 per cent cap comes off. That’s my concern."

Treasurer Wayne Swan said Mr Hockey had "endorsed the government’s strict spending cap, demolishing his own year-long scare campaign".

"Mr Hockey’s endorsement of the government’s spending parameters leaves the Liberals’ scare campaign on government spending in tatters," he said.

A National Australia Bank business survey released yesterday found business confidence up 7 points in January but actual business conditions down 7 points in the month on weaker trading and profits.


Published in today's SMH and Age


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2 comments:

carbonsink said...

RBA: China will boom for two decades!

He may well be right, but how the hell can he be so sure? The RBA doesn't have a Plan B if he's wrong.

The RBA has bet the house on China managing an orderly withdrawal from a credit/housing/investment bubble.

He played down fears that China's steps to tighten lending would lead to a significant slowdown in the economy there, something that has been weighing on the Australian dollar.

"On balance, it is plausible to argue that the recent tightening in credit conditions is a favourable development in that it increases the likelihood that the Chinese economy is on a sustainable path," said Mr Lowe.

Mr Lowe said the Chinese economy was looking very good in the next two decades and infrastructure investment there could continue growing.

Indeed, he expected Asia in general to keep growing strongly but subdued activity in Europe and the United States.

That is crucial for Australia since Asia takes 70 per cent of its exports. China is now its biggest trading partner, with an insatiable demand for commodities that has helped push up the prices of iron ore and coal, Australia's two biggest exports.

This was a major reason Mr Lowe expected a strong increase in Australia's terms of trade – what it gets for exports compared to what it pays for imports – this year.

That in turn was fuelling a boom in investment in Australia's resource sector where many billions of dollars were being spent on mines and liquefied natural gas projects.

rog said...

Just how relevant are these musings?

The reality is that RBA rates do not reflect market rates, Australian banks are amongst the top borrowers globally and have to keep up investment from domestic sources to maintain their ratings.

Hence we see +7% being offered for term deposits

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