Globalisation, it's taking our jobs. And that's bad, right?

Me on ABC Adelaide 891, July 25 2012

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Don't doubt it... the Reserve Bank wants to push up rates

Australia’s Reserve Bank would have increased official interest rates this month, lifting the standard variable mortgage rate to close to 9 per cent, were it not for a number of lenders beating it to the punch and lifting their rates first.

That’s the picture painted in the minutes of the Reserve Bank’s in the minutes of the Bank’s December 4 board meeting, released yesterday as part of the Bank’s new measures to improve communication.

The minutes say that the meeting attended by members including the Governor Glenn Stevens and the Treasury Secretary Ken Henry concluded that “higher interest rates were likely to be required”.

However, independent action by lenders in passing on higher borrowing costs to businesses had done some of the Bank’s work for it...

In time household borrowers were likely to face additional costs as well.

The minutes note that without those changes “there would have been a strong case on domestic grounds for a rise in the cash rate at this meeting.”

But they say that an increase by the Bank taken together with the actions of commercial lenders would have resulted “in quite a significant tightening of overall financial conditions over a short period. On the evidence currently available, and given the uncertainty over the global outlook, this did not appear to be immediately warranted.”

The Board decided to maintain the existing rate “for the time being, pending evaluation of financial market developments and new data at the next meeting”.

That meeting will take place on Tuesday February 5, after the release of the next inflation figures due on January 23.

The minutes say “the question to be addressed at that time will be whether the interest rates faced by borrowers as a result of the combination of policy action and market developments would exert sufficient restraint to contain inflation over the medium term”.

They describe the December decision as “finely balanced”.

The Treasurer Wayne Swan said he fully supported the Bank’s decision to release the minutes and that inflationary pressures had been building for a long time.

“They will take a long time to turn around, but with strict fiscal discipline and investments in the productive capacity of the economy, we can tackle inflation over the long term,” he said.

The interest rate strategist at TD Securities Joshua Williamson said the minutes suggested that the Bank dearly wanted to increase rates in order to restrain a rate of inflation set to climb to 3.5 per cent. But it was worried about whether the economy could withstand such an increase when piled on top of other increases.

The economics team at Westpac noted that the Bank appeared increasingly pessimistic about economic growth in Australia’s major markets calling attention to its statement that it was “uncertain whether the increases pace of growth in East Asia would be sustained in 2008.”

The ANZ Bank’s Mark Rodrigues said, “reading the minutes gives a strong sense that, one way or another, the Bank believes interest rates need to move higher to moderate inflation from unacceptably high levels. While heightened risks around the global outlook at present have prevented
it from tightening, it has not dented its inclination to tighten”.

The chief economist at JP Morgan Stephen Walters said the minutes made it clear that a February rate hike was “all but a done deal”.

“There is considerable pressure on capacity, the labour market remains very tight, the terms of trade is providing a boost to local incomes, wage growth has accelerated albeit modestly, and Australia is less affected by global credit market dislocation than elsewhere," he said.

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Ever wondered what's going on inside the Reserve Bank's walls?

Fear of worldwide economic turmoil has forced the Reserve Bank to put on hold its plans for a further hike in Australian interest rates.

The Bank yesterday broke with tradition and made public the reasoning behind its decision at Tuesday's board meeting not to lift rates, saying in future it would do so after each of its monthly meetings whether or not it decided to move rates.

It also said that beginning immediately it would make public the minutes of each of its board meetings, opening its decision-making process to an unprecedented level of scrutiny.

The Bank's Governor Glenn Stevens, in the job for just over a year, announced the decision after consulting with his new Treasurer Wayne Swan...

Mr Swan said he had a long discussion with the Governor about the moves last week and had offered him complete support.

The minutes for the November board meeting made public yesterday indicate that indicate that at the mid-point of the election campaign board members were becoming increasingly concerned about the rate at which election promises were eating into the projected budget surplus.

The minutes say that a surplus of 2.5 per cent of GDP had been in prospect but that “new expenditure and revenue measures announced since the budget and in the early part of the election campaign had since reduced the projected surplus to around 1 per cent of GDP”.

They conclude that the tax and spending promises had roughly “offset the automatic fiscal stabilisers” meaning that the government had offered the Bank no help in fighting inflation.

Mr Swan said that his government by contrast would help, and declared tackling inflation to be his number one priority.

But he defended matching $31 billion of the Coalition's $34 billion of promised tax cuts during the election campaign saying they would add to productivity.

He said he had become aware of information that suggested that the former Treasurer Peter Costello had tried to “lean on” the Treasury in its preparation of the pre-election financial accounts but he said the Treasury had told him that that the accounts were nonetheless accurate.

The documents released by the Bank indicate that its view about the global economic outlook changed dramatically between its November and December board meetings.

The minutes for the November meeting at which it decided to push up rates portrayed the outlook as benign forecasting that although worldwide growth would slow it would remain “still well above the average of the past three decades”.

The report of this week's December board meeting said that “global financial turmoil” had shaken market sentiment and that growth could fall to little more than the long-run average.

It said that in Australia pressure from the turmoil had been less pronounced than elsewhere but that borrowing costs had risen and that further increases were likely.

In an apparent nod of approval to banks who might want to pass on higher borrowing costs to consumers as the Adelaide Bank did this week to its mortgage customers it said that such moves would take pressure off it to increase official interest rates.

The Treasurer Wayne Swan backed up the Bank saying that while he would “certainly urge all of the banks to think carefully before they raise rates again” such decisions were commercial ones for the banks and that the Governor had “outlined, I think very accurately in his statement today, the commercial environment”.

On Monday the Adelaide Bank lifted all of its standard variable and low-doc mortgage rates by 0.25 percentage points, adding an extra $800 to the annual cost of servicing a $400,000 loan.

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