Tuesday, May 01, 2012

May Day. Bernie thinks we need 0.50 points

Announcement at 2.30 pm here.

Former Reserve Bank governor Bernie Fraser has challenged his successors to cut interest rates 0.50 points today rather than the widely-expected 0.25 points.

The Bank will announce the size of the cut at 2.30 pm. The staff recommendation sent to board members on Friday is believed to recommend a cut of 0.25 points, arguing that the economy is not weak enough to need demand anything larger and that rates can be cut again if needed to bring the total cut to 0.50 points or more.

With the exception of the global financial crisis the Bank hasn’t cut by more than 0.25 points in a decade.

“Everyone is expecting at least a quarter and that loses its impact and its effect on confidence,” Mr Fraser told ABC 7.30 last night. “You have to get ahead of the game occasionally and trump those expectations.”

Asked whether the Bank should cut 0.50 points today bringing its cash rate down from 4.25 to 3.75 per cent, Mr Fraser replied: “Yes, I think the economic circumstances, signs of weakness in large parts of the economy and going with that a lack of worry about the inflation problems, provide an opportunity to do that.”

The privately-calculated TD Securities inflation gauge released ahead of the board meeting yesterday had inflation at 1.9 per cent - just below the bottom of the Reserve Bank’s 2 to 3 per cent target band.

Asked on 7.30 whether the Bank should have a formal target at all.. Mr Fraser said he opposed the action of his successor in signing the letter of agreement with Coalition Treasurer Peter Costello that made formal the 2 to 3 per cent target.

“I went out [of office] at the time Treasurer Peter Costello entered into a letter with my successor Ian Macfarlane. Ian did show me the letter, or a draft of the letter, and asked what I thought of it and I said I wouldn’t sign a letter like that but it wasn’t my call.”

“The reason I wouldn’t sign it was that it was unnecessary. The Reserve Bank Act says what the Bank has to do. It has to have regard to employment and growth as well as inflation. The letter was about giving priority to inflation. Orthodox central bankers don't need any encouragement to give priority to inflation.”

A former head of the Commonwealth Treasury, Mr Fraser ran the Reserve Bank from 1989 to 1996 and drove very big rate cuts to fight the early 1990s recession followed by aggressive rate increases to keep inflation low.

Internationally respected as a central banker, his call for Australia’s Bank to abandon caution will carry weight at today’s meeting. Six of the nine Reserve Bank board members come from the private sector. The other three are governor Glenn Stevens, his deputy Philip Lowe and Treasury secretary Martin Parkinson.

A report of Treasury business consultations released yesterday described mining conditions as “strong”, retail conditions as “challenging” and those in manufacturing as “difficult”.

In today's Canberra Times, Sydney Morning Herald and Age

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