Wednesday, April 16, 2008

RBA Governor: Sympathy but not sorrow

The Governor's delivery during yesterdays ANU lecture and during questions afterwards was flat and understated. Not at all like the more adventurous man who appeared before the Parliamentary committee two weeks earlier.

The ridiculous newspaper coverage that followed that appearance (pictured) seems to have affected him.

The head of the Reserve Bank has expressed sympathy for the Australians hurt by his interest rate hikes.

Asked during a guest lecture at the Australian National University what he had to say to the mortgage holders who had been hurt by the Bank’s 12 successive interest rate rises the Governor, Glenn Stevens yesterday momentarily abandoned his usual reserve and expressed sympathy.

“I would say that I acknowledge that mortgage holders are in many instances doing it tough,” he said.

“But if we don’t control inflation they will be doing it much, much tougher.”

“High inflation is a recipe for very high interest rates. That’s exactly what we are trying to avoid. We are trying to achieve is low inflation.”

Asked about a report on the front page on Sydney’s Daily Telegraph that branded him “Australia’s most useless man” for keeping interest rates high...

...Governor Stevens said he wouldn’t respond but that it was “important that people have confidence in the Reserve Bank to contain inflation and to do what’s right for the economy”.

“They can have confidence in that,” he said.

The minutes of the March Reserve Bank board meeting released yesterday make it clear that the board is aware of the damage high interest rates have been causing. They say that the current 12-year high is “exerting a significant restraining influence on both households and businesses”.

So concerned is the bank about the impact of high rates that it has “stepped up” its liaison with retailers.

That liaison suggests that sales have been flat three months.

In addition, housing finance has been soft “for the past few months”.

In his remarks at the ANU the Governor stressed that while some households were suffering as a result of high rates, almost all were still able to meet their mortgage payments.

“It is true that household debt has gone up a lot,” he said. “But as of December the proportion of housing loans in Australia which were running in arrears of 90 days or more was about 0.32 per cent, which is extremely low, extremely low.”

“For the most part so far households appear to have been managing that debt pretty well”.

Before delivering the annual Sir Leslie Melville Memorial Lecture the Governor told his audience that although it would deal with the worldwide liquidly crisis, the Australian financial system was in “good shape”.

“Nothing said here should be taken as carrying any implication to the contrary,” he said.

Whereas in the United States as many as 20 per cent of mortgages were “sub-prime” or of poor quality, here the proportion of “non-conforming” loans was only 1 or 2 per cent.

“And as far as I know even on those loans the arrears are a fraction of those in the US”.

The Bank’s board minutes reveal that it has cut its forecast for inflation in the wake of its February rate hike and that it expects inflation to decline over time.

The next inflation figures will be released in one week’s time. Even a high result is believed to be unlikely to lead the Bank to push up rates again.