Tuesday, September 21, 2010

Going up, there's a boom on. The Governor says so

Reserve Bank Governor Glenn Stevens has spelled out plans to push up interest rates in order to manage "the largest minerals and energy boom since the late nineteenth century" and made it clear he won't hold off to protect cities such as Sydney distant from the big mines.

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

Related Posts

. 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


2 comments:

Senexx said...

Having read Christopher Joye's comment on the RBA saying they've basically dudded the unemployed and have foregone their legislative duty to maximise employment I have no faith in the RBA at all.

"We do not have different interest rates for certain regions or industries. We set policy for the average Australian conditions"

No different interest rates for different regions - well someone hasn't being paying attention to the regions or the hung parliament, he just wants to drive up unemployment in the regions. Not all these areas are mining central.

I understand they wish to control WA prices - so lobby WA to raise taxes. And yes I realise that is probably unfeasible but it is the correct thing to do.

Rates should be set on either the median or average Australian conditions whichever is lower.

The RBA should not punish people for some idiot investors speculating whether it be in the Sydney housing market or a mine somewhere.

What happened to the last meeting when everyone was basically saying interest rates will be on hold for 12 months?

Until the full legislative agenda of the RBA is restored it should be regarded as a corrupt organisation.

Senexx

carbonsink said...

Colleges face crisis as Chinese stop enrolling

I believe education is, or at least was, Australia's second biggest export earner. Well not anymore! The Dutch Disease accelerates.

I'll say it again, Australians have no need for broadband, apart from entertainment purposes. What Australians need is a shovel. I reckon Gillard should use the $43 billion to buy every man, woman and child and excavator. Start digging Australia, its you patriotic duty!

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