Tuesday, September 21, 2010
Addressing a business audience in Shepparton near the NSW Victorian border he said he had "very effective control over only one interest rate" and that he would need to push it up nationwide in order to manage a boom he conceded was emanating from Western Australia.
"We do not have different interest rates for certain regions or industries. We set policy for the average Australian conditions," he said.
"A given region or industry may not fully feel the strength or weakness to which the Bank is responding. It is this phenomenon people presumably have in mind when they refer to monetary policy being a blunt instrument."
"It is not possible to have different monetary policies by region or by industry within the country, at least not while we are all using one currency and funds are free to flow around," he said.
Baring unforeseen circumstances economic growth was set to climb above trend in coming months and the fall in inflation would not "go much further".
The Bank had only one instrument with which to manage the "fairly robust upswing". The entire nation would have to wear the consequences...
Interest rate futures moved swiftly on his words, the market pricing in a 24 per cent chance of a rate hike when the Reserve Bank board next meets in two weeks time, a 64 per cent chance of a rate hike at the Bank's Melbourne Cup Day meeting, an 80 per cent chance by December and a 120 per cent chance by February, meaning the market is betting on more than one hike.
The Australian dollar jumped from 94 US cents to 94.70 - its highest point since August 2008. It closed at 94.55 US.
"The Governor is preparing the market for higher interest rates," said TD Securities strategist Roland Randall. "He delivered the speech in regional Australia and spelled out why he would be unable to spare regional Australia."
"The speech was laced with strong language," said RBC Capital Markets economist Michael Turner. "He could have easily avoided strongly worded and forward looking comments."
The Bank last lifted its cash rate in May. A further increase would add another $48 to the monthly cost of repaying a $300,000 mortgage and $64 to the cost of repaying a $400,000 mortgage bringing the total extra costs since October to $283 and $340 per month.
If no more than fully passed on the 0.25 per cent hike would bring standard variable mortgage rates to around 7.65 per cent, still well down on the peak of 8.3 per cent reached under the Howard government and 9.6 reached before the global financial crisis under Kevin Rudd.
Governor Stevens used the speech to attack the notion that there were "two Australias" - one in the West benefiting from the mining boom, and the other impoverished and needing mercy.
Melbourne served as the corporate headquarters for many of the mining companies. Sydney housed companies that provided services such as air travel, consultants and geologists. Many remote mines operated on a "fly-in, fly-out" basis with workers commuting from the eastern states.
Mr Stevens produced graphs purporting to show that all Australian cities had experienced much the same increase in prices since the year 2000 in contrast to the United States where there was wide variation.
However a Herald analysis shows that if he had chosen a shorter time period the disparity would have been wider, with Sydney prices climbing 14.8 per cent since 2005 compared to 18.4 per cent in Perth.
Published in today's SMH and Age
Monetary Policy and the Regions - 20 Sep 2010
. The paradox of mining
. Could our mining executives have been having a lend of us?
. To normal and beyond - the RBA's interest rate path