Saturday, March 15, 2008

More trouble for Malcolm (Turnbull)

The head of the Reserve Bank has taken aim at critics including the Coalition Treasury spokesman Malcolm Turnbull who have argued that he shouldn’t be hiking interest rates in order to fight inflation.

In a speech released yesterday but delivered in private to a Treasury seminar earlier this week the Bank’s Governor Glenn Stevens belittled the claim made by the Opposition spokesman that the final figures for last year showed inflation under control.

On the release of the figures in January Mr Turnbull referred to “a lot of fairy stories about the important challenge of inflation” and said that the Coalition had bequeathed to Labor a headline rate “just a fraction below 3 per cent”.

In the speech released yesterday the Governor said that the figure Mr Turnbull referred to had held down by both an unusually low result in March 2007 and a change in the way childcare costs had been calculated in the September 2007.

He said the next figure, to be released in April would be free of those influences and would most likely show an annual rate “more like 4 per cent”...

Mr Turnbull had argued that the costs of housing and financial services should be excluded from the Bank’s calculations of inflation because higher interest rates would only push them up.

Without mentioning the Coalition Spokesman by name the Governor said that some Australians had argued that monetary policy in fact “makes the problem worse by actually raising prices”.

He said while this might be true as rates began to rise, after they began to bite, landlords and financiers would find themselves unable to pass on the higher costs.

“All the historical evidence is that monetary policy is quite effective in that regard,” he said.

Responding to what he said was the common expression that that interest rates were a “blunt instrument” the Governor asked: “Where are the sharp instruments? It is not obvious that there are all that many.”

He also had unwelcome words for the Treasurer Wayne Swan who has undertaken to deliver the tax cuts promised during the election campaign.

The Governor said that while there was a structural case for taxes to fall over time, at the moment there was “a cyclical case for them not to”.

Although keen to suggest that demand from China would keep the Australian economy strong for years to come Governor Stevens hinted that the worst on interest rates could be over, saying Australia’s economic debate was taking the course it usually took at the “top end of the inflation cycle”.

He said many of the arguments being mounted against the actions of the Bank were familiar.

“They tend to recur each time we reach the top end of the inflation cycle and monetary policy has to control it,” he said.