Saturday, February 20, 2010

Did Stevens say Barnaby's not fit for the job?

Nearly. I've a softer spot for Barnaby

The Reserve Bank Governor has declared himself at odds with Coalition finance spokesman Barnaby Joyce and questioned his fitness for the job, telling a parliamentary committee he had "yet to meet a finance minister who has ever mused any possibility about debt default of his own country."

The Shadow Finance Minister claimed this month Australia was "going to hock to our eyeballs to people overseas" and was "getting to a point where we can’t repay it".

Governor Glenn Stevens told the committee yesterday there were "few things less likely than Australia defaulting on its sovereign debt".

"There has never been an event of sovereign default by Australia as far as I know, with one exception for one day – which the Commonwealth stepped in and fixed – in 1931. But there has never been such an event, and I very much doubt there ever will be."

Australia had so little government debt that... on one reading of the proposed new international banking standards there wasn't enough of it to sell Australia's banks the securities they would need.

Mr Stevens told the committee he expected to increase rates two to four more times in the months ahead.

Declaring the financial crisis over, and labeling it only ever a truly global crisis for six to eight weeks Governor Stevens said the cash rate had to move away from its present "emergency settings" and increase by a further 0.50 to 1.00 percentage points so that retail rates returned to about their long term average, "which I think is the appropriate place to be".

Another two to four hikes of 0.25 points would add a further $95 to $190 to the monthly cost of servicing a $300,000 mortgage, but would importantly leave repayments several hundred dollars below where they were before the crisis began.

The future of rates beyond that would depend on inflation and wage pressures. Mr Stevens said the jury was still out on the government's new workplace laws.

"The test is going to be how the new powers are administered and implemented by all the parties involved," he told the committee. "It is important this be done sensibly, extremely important. Flexibility is as key now as ever for us to get the most value out of the opportunities that the growth of Asia presents."

Asked about reports of big wage claims he said it was hard for him "to judge how serious the problems are" but that he could "only record that a lot of business people are expresing concern at the moment".

The immediate future of interest rates would depend in part on the name of the institution with which borrowers had their accounts.

"We have really had three-and-half rate moves so far, or if you are a customer of Westpac four," Mr Stevens told the committeee. "I am not criticising Westpac, I am just saying that if you are a customer of that bank you have had the equivalent of four Reserve Bank tightenings, not three."

Banks would face less competition from no-bank lenders than before "but some of that competition was really doing lending that shouldn't have been done".

Mr Stevens wanted the government guarantee of bank deposits wound back when it came up for review in late 2011. At the moment it extends to deposits worth up to $1 million. No other country had a limit anything like as high, he said.

Published in today's SMH and Age


The global financial crisis is over, leaving just a ''North Atlantic crisis''. For Asia and Australia, as Glenn Stevens sees it, the challenge now is to manage the expansion - and there'll be a lot of it to manage.

Yesterday's grilling by federal MPs found the Reserve Bank governor wary but contented. He's confident that he has called the shots right and Australia is heading back into a resources boom.

It will take time to develop. Much of the economy will not share in it. But the bank sees a future like the recent past, before the brief crisis erupted.

It forecasts a 15 per cent rise in the terms of trade by mid-2011, implying a 3 per cent rise in national income. It sees GDP growing at 3.5 per cent in 2010-11 and 2011-12 alike. But that's just the start.

Stevens and assistant governor Philip Lowe see the future as a resources boom. Lowe, head of the bank's economic team, told MPs that in the next five years we will see ''very significant increases in resource exports … very, very high rates of investment which are going to deliver quite high (growth in) coal exports'' - and ''very high rates of return'' on investments.

That has all kinds of implications, and under some acute questioning, particularly from Liberal MPs Bruce Billson and Jamie Briggs, the RBA team set out some of them:

. Monetary stimulus must be withdrawn. The recession, Stevens said, was the smallest since World War II, leaving ''less scope for robust demand growth without inflation starting to rise again … Monetary policy must therefore be careful not to overstay an expansionary setting.''

Surprisingly, Stevens suggested rates now were only about 50-100 basis points below average, implying that - if bank margins remain static - the near-term target is a cash rate of 4.25 per cent to 4.75 per cent.

But that would only get rates back to average. If the Reserve's vision of our future is right, you can bet it will lift rates well above average to keep inflation under control.

. It is ''important'' the government keeps its pledge to limit annual growth in spending to 2 per cent once activity is back to normal. The Reserve forecasts that will be in 2010-11, which means the May budget. Kevin Rudd and Wayne Swan have yet to confirm that it will.

. Pressure for big wage rises in the resources sector could prevent Australia reaping the full benefit of the resources boom, especially if it leads other workers to seek the same. While conceding that union leaders were doing their job, Stevens quietly laid down the law: ''A rise in unit labour costs is going to push up prices. (If so), we will respond to that. The long-run implication of excessive wage pressure is unemployment.''

. Australia will be ''a two-speed economy'', with states like Victoria taking the pain as the coal states boom. High mineral prices will mean a high exchange rate, putting pressure on manufacturers. Workers must move to where there is demand.

Uh-huh. Perhaps next time the governor can explain to MPs why workers stayed put in the 2005-08 boom instead of moving to Queensland and WA, as the textbooks predicted.

. This boom must be financed, and Australia is resisting moves in the Basel Committee to require its banks to hold far more of their assets in government bonds. We don't even have enough government bonds to meet the rules, Stevens said. But he thinks Australia will win an exemption from these North Atlantic rules - just as it was exempted from the North Atlantic crisis.

Related Posts

. Barnaby was right. The tax heists that made us a nation of losers

. Let's call a stimulus snob a snob

. "The Current Economic Landscape" - in pictures