Monday, February 04, 2008

Tuesday Column: Inside this morning's meeting of the Reserve Bank Board

If you thought that Reserve Bank board meetings got a lot of attention before, wait until today.

At 2.30pm the heart of the nation will momentarily stop. The Bank will announce the outcome of a meeting that has concluded just moments earlier.

Most probably the board will have decided to hike rates. What’s special this time is that we won’t need to wait until the next morning to find out.

As far as I know the Bank didn’t make the change because it was worried about leaks. It made it in order to push its board meetings even closer to the centre of Australia’s decision-making process.

The discussion taking place at the Bank’s Sydney headquarters this morning will be serious indeed. And the result isn’t a lay down misere. The board will have before it a series of papers from Reserve Bank officials setting out the arguments for and against a rate rise and also a recommendation...

I think that the recommendation will be to push up rates. But as recently as a fortnight ago that was no sure thing. International share markets were tumbling and it looked as if the turmoil could knock enough stuffing out of our economy to relieve the Bank of the need to do more.

Since then world share markets have uneasily stabilised and we have been presented with the worst inflation figures in 16 years. My feeling is that the board will be presented with a recommendation to lift rates once again – for the 11th successive time - and also a draft statement explaining the decision for release at 2.30pm.

But that doesn’t mean the board will necessarily accept the recommendation. Seven of its nine members don’t work for the Bank. One of them - the Treasury Secretary Ken Henry - has in the past argued and voted against recommended rate hikes.

Other members whose judgment is immensely respected may be successful in convincing the board to exercise caution.

Roger Corbett, the former CEO of Woolworths has been a retailer for a generation. He would have a better feel than anyone else at the Reserve Bank board table for the point at which higher interest rates and a tumbling share market make consumer confidence snap.

Every successive hike rates increases the likelihood that it will be one too many.

We have been spending as if we haven’t needed to worry about prices. In the last year we have managed to buy an extraordinary nine million new mobile phones and one million (mostly imported) new cars. Five straight years of tax cuts and a guarantee of three more to come have hardly encouraged restraint.

The consumer price figures released by the Bureau of Statistics are replete with examples of retailers either not passing on the benefits of movements in the exchange rate or increasing their prices by more than their costs. The head of the Australian Competition and Consumer Commission Graeme Samuel is convinced the oil companies are doing it.

Why wouldn’t they have been? We have hardly been resisting. But at some point one of the Reserve Bank’s rate hikes is going to hurt too much. If that point comes at a time when financial institutions are imploding, when share market wealth is evaporating and when China’s demand for the things Australia sells is looking shaky, the Bank might - in the tasteful words of one of its former employees, the economist Rory Robertson – find “its fingerprints all over the next recession”.

There is a respectable case for waiting and seeing how things pan out before hiking rates - a case that is respected within the Bank itself. That case could win the day at this morning’s meeting.

The board has influenced the timing (and amount) of rate adjustments in the past.

The former Governor of the Reserve Bank Ian Macfarlane described the process of getting his board to approve rate hikes this way in 2006: “You might feel there is a bit of a case to go now, but it is really not strong enough when you put it down on paper to be convincing to people who might be skeptical and may not have the same intellectual framework in their mind.”

He saw the board as a jury, able to reject or postpone recommendations put before it, a bit like the board of directors of a public company.

“You don’t have specialists on the board of a company. They are people who approach the issue with a lot of practical knowledge - but do not necessarily have the same intellectual framework as the professionals who are proposing the action,” he said.

Among the more formidable members of the board are Jillian Broadbent, a former senior executive at Bankers Trust, and Warwick McKibbin, an independent-thinking ANU economists who once worked at the Bank.

Other members include a former head of the National Farmers Federation Donald McGauchie who has demonstrated his independence as the chairman of Telstra, and two industrialists, John Akehurst and Graham Kraehe.

As they weigh up this morning’s recommendation to increase rates they will be aware of claims that as many as 300,000 homes may soon be earmarked for repossession and reports from Tokyo that Australia’s forth-biggest car maker Mitsubishi is about to close its doors.

The Bank can’t and won’t allow inflation to get away from it, but it could decide to wait another month before taking action to see whether something else dents the economy first.

In earlier times the board members and the Governor retired for a quiet lunch after their monthly meetings. Not today. As soon as the meeting ends and today’s decision is taken the Governor and his senior staff will adjust their draft announcement to take account of what’s actually been decided, load it into their computer and ensure that it is released to the public at exactly 2.30pm.

They will adhere to the new schedule even when Parliament is sitting, meaning that politically embarrassing announcements will sometimes be made half way through question time.

A fortnight after each board meeting they will release a complete set of minutes reminding us once again of their deliberations.

And as usual each quarter (next Monday is the next occasion) the Bank will release a 70-page account of its thoughts.

It will be hard to avoid hearing about the Bank’s deliberations in throughout 2008. We can expect to hear as much from it about the economy as we can from the government.

Which is as it should be. Its responsibilities are as onerous.