Wednesday, November 07, 2007

Kohler: Why not 0.50 per cent?

Alan Kohler writes (but not for the ABC, where he is apparently only a part-time contractor):

The only agonising at yesterday’s Reserve Bank board meeting would have been about whether to increase interest rates 0.5 per cent instead of just the usual 0.25 per cent.

In fact, Governor Glenn Stevens might have mentioned that alternative to quell arguments about the 0.25 per cent hike that they eventually settled on.

A 0.5 per cent rate increase during an election campaign probably would have been going too far politically, but economically there was a case for it...

The case for 0.25 per cent increase was the strongest it’s been since November 2003, when rates were increased in both November and December.

Consider the points:

. quarterly inflation increased by the largest amount for 16 years;
unemployment is the lowest for 20 years;

. retail sales are growing in real terms at 8 per cent a year;
GDP is growing at 5.2 per cent, the highest rate for 9 years;

. annual credit growth is stuck at 16 per cent, around triple GDP growth;

. house prices are now picking up across the country;

. the terms of trade are at a 50 year high;

. and to cap it off, election promises will pump more than $35 billion into the economy over the next 12 months.

It was also a priceless opportunity for the Reserve Bank to emphatically demonstrate its independence with no negative consequences.

For any waverers at the board meeting resistance was useless. It was an open and shut case.

The only question now is whether 6.75 per cent is enough, and that probably depends entirely on what happens from here in the United States credit markets.

The RBA has been pushing on a string, to quote JM Keynes, for five years – the longest and most ineffective period of monetary tightening in history.

It has been ineffective partly because it has been so slow and gradual, and that’s partly why many are now predicting a double-banger - with the second either in December or February – to give the process some bite.

The trouble is that this is a dangerous time to be administering shock treatment to the booming Australian economy.

Yes, it’s true that the world economy is still growing strongly and that despite everything even the US economy continues to produce strong economic data, including payrolls last Friday that were double market expectations.

But the decline of the US housing market apparently still has a long way to go and there is a wide consensus that loan write-downs by banks have only just begun. In fact things could get quite messy.

In any case the US dollar is in long term secular decline and the fall in the USD/AUD exchange rate is being exaggerated by the widening interest rate differential.

From Business Specator via Crikey.