Wednesday, March 05, 2008

What on earth is the Reserve Bank thinking?

You can breathe (slightly) more easily. The Reserve Bank jacked up rates in August, in November, in February and in March. It isn't going to do so in April.

Back-to-back rises, like the two we have just had, are unusual. The Reserve regards this double header – its first in four years – as a way of "turning up the speed" of its assault on inflation.

Having kicked unusually hard, it will wait and see what damage it has done. It won't know until the next official inflation reading comes out on April 23, just days after the Prime Minister's Australia 2020 summit in Canberra...

It won't hike before then at its next scheduled meeting next month.

And if there are clear signs that it is making inroads into inflation
it won't hike at its May meeting either.

The Bank's statement released yesterday points to tentative signs that
it is making inroads. It says household spending seems to be
moderating (we will know more after the release of today's GDP
figures) and that business and consumer sentiment is softer with
household borrowing slowing.

Perhaps the economy is turning down as the Reserve Bank wants.

Certainly the big banks would do it a favour (at a cost to their own
image) if they jacked up their mortgage rates by more than the 0.25
per cent increase the Reserve Bank will initiate today.

The Bank gives the impression it wouldn't mind if they did.

They would have done some of its work for it.

If inflation turns out not to be weakening when the next figures are
out the Bank will push up rates again.

It doesn't buy the increasingly popular argument that it should go
easy on inflation because a lot of it is beyond its control.

It knows that a fair bit of it will respond to higher interest rates
even if it has to hurt a lot of people as it keeps pushing those rates

It isn't particularly squeamish about the damage it causes along the way.

In the words of the Macquarie Bank's Rory Robertson, himself a former
Reserve Bank employee, its attitude is that if tight monetary policy
isn't hurting, it's not working.


The Prime Minister has said he “takes responsibility” for spiraling mortgage rates and hinted at moves to boost savings in the budget as the Reserve Bank has moved to push up interest rates for the second time in four weeks.

The latest rate hike of 0.25 per cent, an unusual back-to-back move following a 0.25 per cent hike in February, is the forth such hike in eight months and the twelfth since the Reserve Bank began pushing up rates in 2002.

It will push rate up to their highest point since January 1992.

It should increase the monthly repayment on a $400,000 mortgage by a further $68.77, or by more if banks and other lenders take the opportunity to widen their margins as they did in January and in February.

A borrower owing $400,000 would be paying $325 a month more than before rates began climbing quickly in August.

Opinion is divided about how soon the Bank will increase again. A statement issued by the Reserve Bank Governor after yesterday's board meeting said he would “continue to evaluate prospects for economic activity and inflation” in the months ahead.

The Bank pointed to “tentative evidence” that household spending was slowing but said that “a significant slowing in demand” was needed in order to reduce inflation.

As the Reserve Bank board met, the Bureau of Statistics released retail trade figures that appeared to show that spending stalled in January after climbing for seven months.

The Bank noted that global financial markets were “fragile” but said that labour market conditions remained strong amid reports of high capacity usage and labour shortages.

It said it had made the move in order to “contain and reduce inflation over the medium term”.

The Bank's two Assistant Governors will explain the decision in two speeches to business audiences
later today.

Declaring that it was “a difficult day for working families”, Mr Rudd said he understood that the Reserve Bank's decision would make life tough for many people.

But he said he had a responsibility to manage the economy.

“I am Prime Minister of the country, I take responsibility for the good news and the bad news and this is bad news,” he said.

The Opposition Treasury Spokesman Mr Turnbull said he was appalled that the Prime Minister and Treasurer endorsed an economic policy which is designed to slow growth.

“They have been egging the Reserve Bank on to put up rates. Remember it was Wayne Swan, who just before the last Reserve Bank meeting said ‘the inflation genie is out of the bottle,’ Now they are doing that because they want to put Australians out of work.”

“Kevin Rudd and Wayne Swan think unemployment is too low, they think it has got to go back up again to slow economic growth, but they are not prepared to admit that, they are trying to fool people into thinking that you can put up interest rates, slash government spending, but it isn’t going to have any impact on jobs,” he said.

“What I want to know about Kevin Rudd’s working families is how many of them will still be working by the time he is finished?”

Mr Rudd said he was considering budget measures to boost national savings in order to put downward pressure on inflation and interest rates.

“We’re the party of superannuation and we have always supported ways and means by which you can boost private savings and encourage that,’’ he said.

The bank will next consider pushing up rates at its board meeting in May after the release of the next official inflation figures on April 23.