Saturday, August 18, 2007

Saturday Forum: The Governator turns mythbuster.

Australia's most powerful bureaucrat cut the credibility of his political masters to tatters on Friday, demolishing three of the main arguments they have used to argue against a change of government.

Doubtless Glenn Stevens, the Governor of the Reserve Bank for a little under a year, wasn’t trying to be political.

He said so a number of times under questioning from both sides of politics at his semiannual appearance before the House of Representatives Economics Committee, this time meeting on the Gold Coast.

But he is a direct man who says what he thinks.

He thinks it is nonsense to claim that interest rates will always be lower under one party than the other, as the Coalition insists. And he thinks it borders on laughable to suggest that interest rates could ever return to their highs of the 1980s, another Coalition claim.

As to the suggestion that state government borrowing for infrastructure will force up interest rates, a theme of Coalition advertising, he says “it’s quite apparent that infrastructure needs to be expanded”.

And when asked about the wisdom of returning to centralised wage fixing system, another Coalition theme, he counters with a question: “is anyone actually proposing that system?” ...

But he is his at his most direct outlining what is essentially a new doctrine that would allow his board to push up rates during an election campaign, so it feel the need.

He predecessor Ian Macfarlane declared just last year that while there was nothing to stop the Bank pushing up rates during an election year "we would not be all that keen to be changing them in the election campaign".

In his first appearance before the parliamentary committee this May Stevens appeared to endorse that view.

Not now. Having broken one taboo a week ago and forced up rates during the year of an election he asserted his right to break another and force them up while campaigning was taking place. (The most likely date is Wednesday November 7, following the board meeting that will consider the next inflation figures).

Making it clear he had anticipated the question he read out and then amplified a prepared reply.

“If it is clear that something needs to be done, I don’t know what explanation we could offer the Australian public for not doing it - regardless of when an election might be due,” he said.

“I don’t think there is any case for the Reserve Bank board to cease doing its work for a month in the month that an election is going to be. I doubt very much that members of the public would regard that as appropriate and so, should the inflation data or other data make that case, I feel we have no choice - nor should we have any choice.”

Disturbingly for politicians or others hoping that the worldwide financial turmoil might put on ice plans to hike rates, the Governor came close to dismissing concern about the US meltdown. He said he and others had long expected it. When interrupted by the sound of music from a mobile phone at the hearing he said, “in some ways that’s appropriate because the music was certainly playing for some years there.”

He said in Australia a lot of people were “behaving in a way which I think in the past few days we’ve seen bordering on irrational”.

Asked whether he would have still have pushed up interest rates last week if he had known the meltdown was about to happen he replied: “We could see that there were tensions in global markets to come extent. We did not think at that time that those things were likely to make a difference to the macroeconomic outlook sufficiently to outweigh what we thought was a pretty clear case for a modest adjustment to interest rates. I still think that.”

Indeed he said not to have pushed up rates for fear of adding to the turmoil might have even caused more trouble.

“No credible case could be made for that idea. In fact, it would probably have been more destabilising to expectations not to have carried out a policy adjustment that most people could see was needed.”

He acknowledged that higher interest rates would hurt saying: “That’s the idea, that’s how it works. We are not pretending that there’s no pain involved. The idea is constrain spending relative to supply and dampen the pressure on prices.”

Would he do it again, within months? He noted that the markets expected the US Federal Reserve to cut rates and Australia’s Reserve Bank to push them up and added ominously: “that doesn’t mean we have to do that, but current expectations are quite different between the two countries, not without reason I would say”.

Unlike the US, the Australian economy had “a lot of momentum, it is very fully employed, it is enjoying - if that’s the word - substantial external stimulus, and inflation has gone up a bit over the past couple of years. Our job is to be alert to that and to try to make sure we’ve got a setting in place that resists those pressures.”

Political parties have very little to do with the general level of interest rates, according to the Governor. In fact: nothing, over the long term.

This public airing of what’s regarded privately as a truism within the Reserve Bank appears to designed to head off another advertising campaign along the lines of those used during the last election asserting that under one party interest rates would always be lower than other the other.

It is a line repeated by the Prime Minister as recently as last week.

But as the Governor sees it, “if you are talking about long sweeps of time, the principal thing that drives nominal interest rates is the ongoing inflation rate”.

“Our job is to anchor inflation at 2 to 3 per cent, I think both sides of politics agree with that. We are independent to do that and if we’re successful in doing that the nominal interest rate would be driven by that. Frankly if you want much lower interest rates in the long-run, choose a lower inflation target.”

The idea that interest rates could return to their earlier highs experienced under the 1980s governments of both Malcolm Fraser and Bob Hawke struck the Governor as absurd. The Reserve Bank fought hard to get inflation down from 8 to 2.5 per cent. It wasn’t going to give up that gain, and the average level of interest rates was calibrated “to what the inflation rate is”.

But what about a return to centralised wage fixing, wouldn’t that be a risk, a Coalition MP asked hopefully.

It certainly would be, Stephens replied - but not a risk to interest rates. The Reserve Bank would keep them broadly where they were at the moment. The risk would be to employment.

Stevens was pleased that the Australian labour market was “very, very different to the late 1970s and 1980s”.

“I think it is obvious that two successive governments of differing political persuasions have moved things in the direction of less centralization, more flexibility, more focus on productivity and so on.”

“A highly centralised system would not handle the current circumstances at all well he said, adding “the question is: is anyone actually proposing that system?”

“I think what is being debated at the moment in the political sphere is the extent to which very recent changes get reversed.”

If Mr Stevens political masters continue to campaign on the basis that a vote for Labor will be a vote for an industrial relations policy that will put upward pressure on interest rates, they won’t be able to imply that he supports them.

In fact about the only argument against Labor’s industrial relations policy that they would be able to mount with the Governor’s implicit support would be that it would make very little difference, that it is a paler echo of their own.

This month the Coalition launched an internet ad attempting to blame “Kevin Rudd’s Labor premiers” for putting upward pressure on interest rates by planning to borrow $70 billion over five years, “plunging Australians into debt again”.

The problem for the Coalition should it continue to run the ad is that the man in charge of interest rates made it clear at the hearing that he has no problem with the premiers borrowing plans.

He has even discussed those plans with “a couple of the state treasurers”. They have assured him that if the projects push up prices they will just “delay them until things calm down”

“I think that’s very sensible. I think they’ll be able to make that call themselves if they’ve got a good sense of how the costs of the projects are moving”.

Stevens is in no doubt that extra infrastructure spending is needed, both by governments and by private companies.

“Ideally it would have been done five years ago when the miners didn’t want to do it, but it wasn’t. I think it is reasonably clear we need more infrastructure over time for the economy to grow, otherwise we will be permanently capacity constrained”.

But wouldn’t the spending by the states be inflationary, the Governor was asked.

“Compared with what?” he replied. “More spending by someone somewhere, all other things equal, puts more pressure on demand and therefore on the economy’s available capacity. You could equally say that spending by the mining sector on what they are doing is inflationary”.

“I am not sure how different it is for a government-owned water utility or electricity authority to invest. It adds to demand and in the medium term adds to supply. So what’s the difference between those things, other than one’s public, one’s private?”

In the longer term the investment would help the economy.

“We will see that I think in the next couple of years in the minerals sector where there are big capacity expansions currently being done starting to come on stream, and our ability to supply exports is going to improve. GDP will go up but so will potential GDP to the same extent.”

On Friday the Governor declared that he was his own man. He may have been appointed by the Treasurer, but he won’t answer to him and won’t lend him support or keep quiet for his sake on anything that’s politically sensitive.

It is hard to imagine Governor Glenn Stevens, appointed for seven years and now just a few months short of his 50th birthday, appearing in government-scripted TV ads designed to enhance its political position.

In part that’s a measure of who he is.

But it is likely to also reflect fury within the Bank about the way it was treated during the 2004 election campaign. The Coalition invoked its name to make claims it did not think were true. The Bank complained privately to the Liberal Party and wrote to the Australian Electoral Commission.

Its then Governor said later that he had been “sort of disappointed but there was no way I could speak out”.

By delivering a few shots across the government’s bows this week the new Governor may have ensured that he won’t need to.


Australia’s Reserve Bank Governor Glenn Stevens yesterday demolished three of the key claims made by the Prime Minister, the Treasurer and the Workplace Relations Minister about Labor and interest rates.

Under questioning by members of the parliament’s economics committee at a special hearing at Broadbeach on the Gold Coast the Governor declared that general interest rates would be little changed whoever took office.

The Prime Minister has consistently maintained that “interest rates will always be lower” under the Coalition than under Labor.

Governor Stevens told the parliamentary committee that “as a long-run proposition the rate of interest goes with the rate of inflation” which he said was under his control.

“Our job is to anchor inflation at 2 to 3 per cent. I think both sides of politics agree with that, and if we’re successful the nominal interest rate would be driven by that,” he said.

“I suspect that the various comments that are made about what interest rates would do under this or that policy are about transitional periods. Well I’ve no comment on that, but as a long-run proposition the rate of interest goes with the rate of inflation.”

The Governor rejected the Coalition’s claim that labor’s industrial relations policy would put pressure on rates, saying firstly that any recentralisation of wage setting would affect the unemployment rate, not the interest rate, and secondly that he did not believe that was what Labor was proposing.

“I think it is obvious that two successive governments of differing political persuasions have moved things in the direction of less centralisation. I don’t think an objective observer would conclude differently to that. I think what is being debated at the moment in the political sphere is the extent to which very recent changes get reversed,” he said. said.

The Governor treated the line being pushed in Coalition advertisements that Labor state governments would put pressure on inflation and interest rates with something close to derision.

He replied: “Compared with what? You could equally say that spending by the mining sector, that what they’re doing, is inflationary.”

“I do not think it is necessarily the way to go to single out particular chunks and say - this is inflationary, but all these other things are not”.

Mr Stevens revealed that he had had discussions with state premiers about their plans to borrow for infrastructure spending and was reassured by what they had told him.

“I think it is reasonably clear we need more infrastructure over time for the economy to grow, otherwise we will be permanently capacity constrained,” he said.
Labor’s Treasury spokesman Wayne Swan said the Governor had debunked the Prime Minister’s mythmaking.

“He has underscored the comments of the former governor Ian Macfarlane who said after the 2004 election that the desperate claims made by Howard and Costello were – quote – incorrect.”

The Treasurer Peter Costello said that the Governor’s opening statement had supported the government’s view “that our real economy is strong, that inflation is contained, that we have to be vigilant in relation to this and interest rates will go up if industrial relations is rolled back.”

The Governor said that the global financial crisis had had little impact on Australia so far and had not eased his concern about inflation.

He if the bank had to push up rates in November after the next inflation figures, it would do so.

“I don’t know what explanation we could offer the Australian public for not doing it, regardless of when an election might be due,” he said.