Wednesday, July 21, 2010

The Gov spells it out - these are the things that will make me push up rates on August 3

And he doesn't think much of Tony Abbott's economics - more on that below

The Reserve Bank has prepared the way for a extraordinary mid-campaign rate hike, spelling out in unprecedented detail the triggers that will make it move when its board next meets in 13 days time.

The board's minutes - released as the Coalition declared interest rates central to its campaign - for the first time include a staff forecast of the inflation rate the Bank expects when the official figures are released next Wednesday and say if it is not met a hike is on the cards.

A jump in the cash rate from 4.5 to 4.75 per cent would add a further $48 to the monthly cost of servicing a $300,000 mortgage and $64 to the cost of repaying a $400,000 mortgage, taking the total extra costs since October to $283 and $339 per month.

The Bank wants to make the process by which it will decide on an a hike in 13 days time as clear as possible so as not to take the Gillard government by surprise.

When it pushed up rates mid-campaign in November 2007 - it's first such hike - Prime Minister John Howard appeared unprepared... apparently having believed the Bank would make no such move.

This time the onus is on the Bank to act rather than wait if it thinks conditions warrant a hike, in order to be even-handed.

The minutes say bank staff are expecting the June quarter inflation figure to be "a little above 3 per cent" on an annual basis when it is released next Wednesday, but caution that is not the figure to watch as it will be contaminated by the 25 per cent increase in tobacco tax.

Instead the Bank will watch the so-called underlying rate of inflation which it expects to "continue to moderate in year-ended terms, to be below 3 per cent for the first time in three years."

Should that not be the case - should the underlying rate be materially above 3 per cent - it will be be minded to act. In its words, "the important consideration for the board at its next meeting would be whether the new inflation materially changed the medium-term outlook for inflation.''

And there's a catch, also spelled out in the minutes. The board will want to be sure that conditions in Europe don't make a hike dangerous. It's sweating on the result of "financial stress tests" due later this week.

If the results are good we will be get a campaign rate hike, should the underlying inflation rate be more than a touch above 3 per cent. The board will feel compelled to give us one.

Published in today's SMH


Meantime...

Reserve Bank Governor Glenn Stevens has pulled out the floor from under one of the Coalition's key election policy planks, declaring Australia has "virtually no net public debt".

As Opposition Leader Tony Abbott pledged in Melbourne a "complete focus on getting debt and deficit under control," in Sydney Governor Stevens was preparing to deliver a speech that point by point countered the arguments that government debt was bad or that Australia's was large.

But in a warning to Prime Minister Gillard he made clear the Bank would push up interest rates at its next meeting on August 3 declaring the board would, "meet, consider all the issues for the economy and do its job. What else do people expect?"

The key to an interest rate rise during the campaign will be next Wednesday’s inflation figures. The Reserve Bank took the unprecedented step yesterday of nominating the underlying inflation rate that spells danger for Labor: 3 per cent.

It wants to make the process by which it will decide on an a hike in 13 days time as clear as possible so as not to take the Gillard government by surprise.

When it first pushed up rates mid-campaign in November 2007 Prime Minister John Howard appeared unprepared, apparently having believed the Bank would make no such move.

The Bank's board minutes released yesterday say its bank staff are expecting the June quarter inflation figure to be "a little above 3 per cent" on an annual basis when it is released next Wednesday, but caution that is not the figure to watch as it will be contaminated by the 25 per cent increase in tobacco tax.

Instead the Bank will watch the so-called underlying rate of inflation which it expects to "to be below 3 per cent for the first time in three years."

Should it not fall below 3 per cent it will be be minded to act. In its words, "the important consideration for the board at its next meeting would be whether the new inflation materially changed the medium-term outlook for inflation.''

The one qualification, also spelled out in the minutes is that the board will want to be sure conditions in Europe don't deteriorate. It is sweating on the result of "financial stress tests" due later this week.

Mr Abbott said a Coalition government would deny states hundreds of millions of dollars in promised infrastructure spending in order to get the budget back into surplus.

Announcing another $1.2 billion in spending cuts, he took the knife to a range of government initiatives including Kevin Rudd’s proposed global carbon capture and storage institute and the pitch for a seat on the UN Security Council.

A coalition government would also insist that unions pay the full cost of running elections monitored by the Australian Electoral Commission, a measure worth about $25 million over four years.

"As every small business right around Australia knows, as every household knows, over the last three years there’s been a lot of belt tightening," Mr Abbott said. "Now if households and small business, if families have got to tighten their belt, it’s only right and proper that government should be tightening its belt too."

"The government is borrowing $100 million a day, every day, over the course of this campaign, debt will increase by $3.5 billion because of the spending spree of the Rudd/Gillard Government."

Governor Stevens said higher public debt levels were "largely unavoidable" for major economies.

In Australia there was "virtually no net public debt in the country at all in contrast to much of the developed world".

"The most recent figures out of Canberra was a peak of five or six per cent of GDP. So far from that being the highest in history, it is closer to the lowest," he said. Australia's public debt to GDP ratio approached 100 per cent during the 1960s.

The board minutes also defended government spending, saying the stimulus had made a "sizeable" contribution to the economy’s recovery.

Coalition Treasury spokesman Joe Hockey said he saw no conflict between the Bank’s view that public spending supported the economy and his view that it harmed it.

"The Reserve Bank’s minutes are looking backwards, we are looking forwards," he told the Age.

Published in today's Age


Related Posts

. Lock August 3 in your diary, it's the most likely date for a pre-election hike

. Savings? The Coalition has just has found an extra $1.2 billion

. The Coalition's May savings list - $46.7 billion

RBAM