Tuesday, October 26, 2010

Governator Stephens: No compromise on inflation

So Melbourne Cup looks live (again)

Increasingly fevered speculation about a Melbourne Cup Day interest rate rise has put a rocket under the Australian dollar, sending it close to parity with the US dollar in early European trade for only the second time since the float.

The Aussie hit 99.72 after the Australian close before slipping to 99.50 after soaring more than a cent on a key inflation figure and tough talk from the Reserve Bank Governor Glenn Stevens.

The producer price index, a key component of the consumer price index due out tomorrow jumped 1.3 per cent in the September quarter, more than double economists expectations.

Governor Glenn Stevens told an Australian Industry Group forum in Canberra there was no chance of him easing the Bank's 2 to 3 per cent inflation target to cope with the resources boom.

"We didn't do any better coping with previous booms by letting inflation go to 25 per cent like we did in the 1950s - that was followed by a deep recession," he told the business audience.

"In the 1970s inflation went to 20 per cent followed by ten years of not very good economic performance. Tolerating inflation didn't help us, it hurt us"...

Even relaxing the target marginally would take Australia "back to a world of much more uncertainty in the economy and much higher nominal interest rates than we presently have - it's not a world you want to go to".

Furtures market traders, previously pricing a 37 per cent chance of a rate next Tuesday, upped their guess to 49 per cent. The dollar jumped more than 1 US cent.

Mr Stevens said the resources boom was flodding the economy with "serious money".

"It's 12 per cent of GDP, roughly $150 billion - that's serious money and that's expansionary. It is an expansionary shock, which is why we have been talking the way we have about the need for monetary policy that recognises that."

"It will also force structural change in the economy."

"Minerals, energy, parts of construction that help them and all the other parts of the economy that feed into the resource sector, they are going to grow. Other parts of the economy will get smaller, not necessarily absolutely but in relative terms - they will not grow as fast. That's hard for people to adapt to. It is what peple are talking about when they refer to a two speed economy."

Mr Stevens said although the Bank expected Australia's export prices to come off their current highs, economic stress would be "unavoidable".

Asked to venture an opinion on Australia in ten years time Governor Stevens said ten years ago was told repeatedly that Australia was part of an "old economy" that had missed the high tech boom.

"The point is that forecasting is very hard. We can probably can make a few very general observations about the decade ahead, but not much more. Real income per head has generally been on an upward trend and most likely that will continue. Australia's per capita GDP will probably be roughly 15 per cent higher in real terms than it is now."

"In 2020, there will probably be an extra couple of million people working, but exactly how all those people will earn their living is considerably less predictable. Some will be in industries or occupations that barely exist. No one can give you a blueprint, any more than the pundits a decade ago, at the height of the so-called new economy fad."

Published in today's SMH and Age

Cross-Currents in the Global Economy - 25 October 2010

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