Wednesday, December 05, 2007

The Bank's gift to its new Treasurer - another bloodless coup

"The Reserve Bank, Australia's unelected and largely unaccountable manager of the money supply, has used the change of government to grab even more power."

Wayne Swan's baptism as Treasurer could hardly be more different to Peter Costello's.

Back 11 years ago a nervous and initially tentative Peter Costello took the reigns at a time when inflation was falling. It kept falling, and within months the new Treasurer was declaring that “the inflation dragon is dead”.

Australia's private banks voluntarily slashed their mortgage rates (because of a lower cost of funds they said, but really it was because of competition from upstarts such as Aussie and RAMS) and the Reserve Bank Governor Bernie Fraser announced the first in a string of official interest rate cuts that would add up to almost three complete percentage points.

The new Treasurer had landed in clover. He didn't give Labor the credit he might have, but he had arrived in office at the right time...

By contrast Wayne Swan yesterday took to the podium at a time when inflation was soaring and the private banks were preparing to hike mortgage rates of their own volition (because of the cost of funds they said, but really because of the troubled times facing upstarts such as Aussie and RAMS).

The Reserve Bank made it clear that it feels to the need to push up rates once again, and that the only things staying its hand are concern about “global financial turmoil” (its words) and the feeling that by fattening their margins the private banks might do its dirty work for it.

He must be wondering who to thank.

But there's a common thread linking Wayne's world in 2007 to Peter's in 1996. The Reserve Bank, Australia's unelected and largely unaccountable manager of the money supply, has used the change of government to grab even more power.

In 1996 Bernie Fraser made it clear to his incoming boss that he would decide the timing of interest rate moves independent of political considerations. He cut rates in July rather than waiting until after the August budget as his Treasurer wanted in order to make his budget look good.

In 2007 Glenn Stevens has presented his incoming boss with a fait accompli. From now on the Reserve Bank will publish a commentary on its thoughts immediately after each of its monthly board meetings, followed exactly two weeks later by the minutes of that meeting explaining those thoughts in detail.

The timing means that every two weeks the thoughts of the Reserve Bank will be part of the Australian news cycle. The Treasurer and the elected government will be forevermore working in the Bank's shadow.

Its probably no bad thing. We are entering very uncertain times.

Yesterday's National Accounts show that while the economy continues to grow strongly at an annual rate of 4.3 per cent things are becoming patchy. Productivity has taken another dive, and the ACT economy has gone backwards, as has South Australia's.

We've begun saving more, perhaps sensing that good times are no longer guaranteed.