RIP "Go for Growth"

If you remember that slogan you will probably also remember the Coalition's similarly appalling: "Aspirational Nationalism".

Pardon me while I. . .

Anyway, today the Reserve Bank Governor Glenn Stevens made it clear what he thinks of "Go for Growth".

It makes you pray that John Howard and Peter Costello didn't mean it.

Here's the relevant bit from Stevens:

"The economics of full employment are different from the economics of trying to get to full employment. This is a simple point, but an important one...

When the economy has too much spare capacity – say, in the aftermath of a business cycle downturn – the aim of macroeconomic policies is to push up demand so that it catches up to supply potential. There may be several years in which demand growth exceeds the normal pace as it eats into the spare capacity.

Once the spare capacity has been wound in, however, actual growth in demand and output has to slow, to match the growth rate of potential supply.

That growth in potential supply is given by the growth in the labour force, the capital stock and the productivity of those factors of production. Typically we think of ‘potential GDP’ in Australia rising by something like 3 per cent a year, give or take a bit.

This, as my predecessor Ian Macfarlane remarked a few years ago, means that once the reserves of spare capacity are pretty much used up, we should expect to be accustomed to growth rates for GDP starting with a 2 or a 3. There will not be many with 4s or 5s, as we had for some years through the 1990s and earlier this decade.

Periods of growth noticeably above about 3 per cent will be roughly matched in frequency and duration by periods below – as we are having now."

If we set our aspirations higher than that – if we try for above‑average performance all the time – we will just get inflation. That is the economics of full employment."

Kapow!

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Does the reserve bank buy or sell bonds in order to move interest rates?

Neither.

From today's RBA Annual Report:

"The announcement of a change in monetary policy is normally sufficient in itself for the market to move the cash rate to the new target."

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Lehman changes everything...

...for Australia's Reserve Bank

An interest rate cut at the next Reserve Bank board meeting on October 7 is now a live possibility as a result of the collapse of Lehman Brothers in the United States.

The minutes of the Bank’s most recent board meeting on September 2 released yesterday contain no hint that there would be a follow-up cut. They say the decision to cut in September was reached on “balance” after weighing up “opposing forces confronting the domestic economy”.

The collapse of Lehman Brothers, the fire sale of Merrill Lynch, and an impending worldwide shortage of capital have dramatically changed that landscape.

The Bank believes that four risks have grown since the weekend.

One is that money will become hard to get as international investors shut their wallets...

In the first two days of this week the Bank has spent around $4 billion buying bank securities for cash in order to ensure that they have ready access to it.

Its September minutes express concern about the rising cost of funds in financial markets and indicate that was one of the factors that persuaded it to cut its cash rate. Those costs are likely to rise much higher.

Another risk is that the US will slide into recession, dragging down the world economy and commodity prices with it. That would slow the Australian economy and ease any risk of resurgent inflation.

There is also a risk that Australians will feel much poorer and wind back their spending in the wake of the slide in our share market. The Australian market slid 1.5% on Monday and a further 1.4% on Tuesday.

And there is the risk that Australian banks are themselves exposed to Lehman Brothers. In parliament Prime Minister Rudd described that exposure as “modest”. Westpac said that its exposure was less than A$10 million.

But Mr Rudd said it was important to acknowledge that Australia was part of the global financial system and “therefore not immune”.

The Prime Minister and the Treasurer were by the Reserve Bank Governor Glenn Stevens and the head of the Treasury Ken Henry Tuesday morning.

The futures markets yesterday pushed up further the implied probably of an October interest rate cut, pricing in a greater than 100% chance of a cut of 0.25 percentage points. This suggests that the market believes there’s a chance that the Bank will cut by more than 0.25 points on October 7.

The Bank last cut interest rates by more than 0.25 points in April 2001 when it cut by 0.50 percentage points in a successful effort to prevent Australia falling into the recession that awaited the US.

It was due to get an idea of how seriously US authorities viewed the crisis at 4.15 this morning when the Federal Reserve US revealed whether its Open Market Committee had decided to cut US rates. A decision by the Fed to cut its federal funds rate by 0.50 percentage points to 1.5% would be seen as a sign that it was very worried.

The Reserve Bank’s Governor Glenn Stevens will have an opportunity to outline his reaction to developments in the US at a previously scheduled speech at lunchtime today.

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What doesn't the new Liberal leader know about?

Search me

Malcolm Turnbull may be the best connected leader the party's ever had.

His links extend into the law, high finance, personal finance, information technology, academia, the media and the Australian Labor Party.

He first made contact with the labour movement while packing fruit at the Sydney markets in between finishing school and starting university.

As he remembers it, “I think I had been sacked or I was having some problems with my employer so I went down to the Trades Hall to ask for help"...

The then head of the NSW Trades and Labour Council Barry Unsworth listened “with a modest amount of interest and said, you should see another Trades Hall official Bob Carr.”

Later to become the NSW Premier, Turnbull says Carr “didn’t seem particularly interested, but then uttered the line I’ve never forgotten, which was: I’ve just read a fascinating book on the politics of Eastern Europe, would you like to borrow it?”

The two became firm friends. In the 1980s Turnbull partnered with another former Labor Premier Neville Wran and a Labor son Nicholas Whitlam in an investment bank they entitled Whitlam Turnbull (and later renamed Turnbull and Partners when Whitlam was forced out).

After packing fruit, he worked as a journalist for The Bulletin magazine and Channel Nine. Even now he has been known to direct television journalists in their work, suggesting shots.

Moving to the other side of the camera as Kerry Packer’s personal lawyer, he defended the Nine Network owner vigorously when his reputation was under attack at the Costigan Royal Commission and later won a landmark case against the Thatcher government in the so-called Spycatcher trial. He was for a time one of the most famous lawyers in the country. He married Lucy, daughter of the famous Sydney Queen's Counsel Tom Hughes.

At Turnbull and Partners and later as head of Goldman Sachs in Australia he made enemies and had success in corporate takeovers, becoming involved in the affairs of the Alan Bond group of companies, Fairfax and the insurer HIH.

As a private investor after corporate life he owned stakes in technology and personal investment companies. As head of the Liberal Party’s Menzies Research Institute he developed deep links into academia, giving him access to ideas well beyond those usually available to Australian politicians.

He knows his way around.

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Joy from tonight's ABC news.

I don't know exactly why, but tonight's account lifted my spirits:

"Babcock and Brown plunged 33% to a record low, Allco fell nearly 20%, and Macquarie was down 7% to its lowest in four years."

I'm sure it shouldn't have.

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Costello - not in it for the money

He is not in it to be leader. He won't stand today.

Is it the money? Not that either.

Whatever reasons Peter Costello has for continuing to hang around, they don't include money.

Right now, as a backbencher, the former Treasurer is earning $127,000 per year.

But calculations performed by The Age using tables prepared by the Department of Finance suggest that if he retired instead, his annual income would jump to $176,633 courtesy of Australia's generous parliamentary superannuation scheme.

That payment would grow with increases in parliamentary salaries and would stay with the 51-year old for the rest of his life.

In plain terms each extra year that Mr Costello remains in Parliament as a backbencher is costing him $50,000. Each extra week is costing him $1,000.

And staying on won't boost his super payout...

Peter Costello entered Parliament in March 1990 – more than 18 years ago.

Eighteen turns out to be an important number in the design of the parliamentary superannuation scheme. Before 18 years there's something to be gained by staying on to build up a bigger super payment. The payout increases by 0.00685% for each additional day that an MP stays in office.

But at 18 years the payout hits a ceiling of 75% of the backbench salary (plus an allowance for having served as a Minister) and can't move higher.

In recognition of that after 18 years the required super contribution drops from 11.5% to 5.75% of the MP's salary.

But from the point of the view of the MP it's wasted money. The extra super contributions don't increase the super payout.

The payment that Peter Costello gets for having served as the Treasurer is also close to maxing out. As Australia's longest-serving Treasurer, in the job for more than 11 years, he is entitled to 73.4% of the extra salary he got as the Treasurer, close to the maximum of 75 per cent allowed under the rules.

If he wants he can halve his $176,633 per year pension and turn the rest into a lump sum of $1.77 million.

But, in the spirit of the rules that he oversaw when he was Treasurer, he will be unable to get access to the lump sum until he is 55.

Another rule that he introduced might complicate things. In his first budget Peter Costello slugged high-income earners with an extra superannuation surcharge, worth 15% of their super contributions.

He abolished it nine years later. As a member of parliament he has had the right to pay the surcharge each year as it fell due or to let it accumulate and to pay it with interest on his retirement.

If he took the second option it'll cut his retirement payout.

Whatever he does he'll be better off than many. MPs elected after 2004 get access to a much less generous scheme.

As the leader of his party pointed out in parliament Monday, single old-age pensioners get $273 per week. At $14,196 per year, its a mere 8% of what the former Treasurer will make.

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The coming pensions review will be easy...

Its already on the shelf

The Rudd Government's claim that it must wait for a review before raising the age pension has been undermined by the revelation it considered a detailed submission on the question before the May budget.

Documents released to the Seven Network under the Freedom of Information Act reveal cabinet considered an 83-page submission, including detailed options, on increasing payments to age pensioners on March 25.

But it decided to take no action other than continuing the annual $500 pension bonus and raising the utilities allowance.

"It is now clear Mr Rudd's committee on pensions is just a cynical smokescreen hiding his deliberate refusal to help Australia's pensioners," said Opposition Leader Brendan Nelson.

Treasurer Wayne Swan yesterday maintained that he needed a full report before considering Dr Nelson's proposal for an immediate rise in the single age pension of $30 a week.

"We want to have a comprehensive look at all of the issues that arise when you increase a base rate of pension, and to make sure we do it in a comprehensive way," Mr Swan told Brisbane radio...

"The pensions review will report at latest by February so we can take action in next year's budget."

That review is being conducted by the head of the Department of Families, Housing, Community Services and Indigenous Affairs, Jeff Harmer.

The documents released to the Seven Network reveal that it was Dr Harmer's department that prepared the cabinet submission in March, suggesting the department has already examined the options the Treasurer is asking its head to examine.

Among the changes it considered was altering the way in which age pensions are benchmarked to male total average weekly earnings.

At the moment they are increased each March and September in accordance with movements in earnings to the previous November and May. The department considered adjusting the pensions in accordance with the forecasts of future movements in earnings.

The FoI documents reveal the Treasury opposed the idea, saying it would mean indexing the pension to a figure that was not independently sourced.

Prime Minister Kevin Rudd first wrote to Mr Swan about increasing the age pension on March 12, a few days after media reports raised the possibility the $500 pension bonus paid by the previous government would not be continued by Labor.

A series of emails between the Treasury and the Department of Families and Community Services followed, ending in a cabinet submission on March 25 and a briefing for the Treasurer on April 16.

Most of the options considered by the departments were blacked out in the documents released under the Freedom of Information Act.

During the past week, ministers including the Prime Minister, the Treasurer and the Deputy Prime Minister have conceded they would be unable to live on the single age pension of $273 a week.

The documents suggest that they have had options before them for increasing the age pension for six months.

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Meanwhile the ABS is doing its best...

...to get good statistics

Today's Adelaide Advertiser reports:

"An 85-year-old stroke victim and his 80-year-old wife have been threatened with fines of $110 for every day they refuse to be part of an Australian Bureau of Statistics employment survey.

Antonia Van Den Berg and her invalid husband, Bert, of Kilburn, are among 27,000 households used by the ABS for its monthly survey to determine the nation's official unemployment rate.

Mrs Van Den Berg has told the ABS she and her husband do not think their views on the job market are relevant – they would not be looking for work, and were tired of being asked questions about employment.

"I just want them to go away – we are so old and we don't want to be pushed around and told we will be fined $110 a day as punishment," she said.

"They are asking us things like how many hours we work, which is just silly, and they demand to be let into the house and demand we answer questions."

Mrs Van Den Berg said she could not sleep because of the threats and was scared of being fined."

Continued...

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What if you couldn't trust the employment figures?

A surprise dive in Australia’s unemployment rate has thrown future interest rate cuts into doubt.

The unemployment rate fell from 4.3% to 4.1% in August as an extra 14,600 Australians found new jobs, half of them in Victoria.

The official figures suggest that an extra 8,659 Victorians found jobs in August, more than reversing the slide of 7,880 in the previous six months.

But the are less reliable than in the past...

The Bureau of Statistics has warned that monthly changes in the state totals are subject to greater than usual margin of error as a result of its decision to cut the number of households it surveys by 24%.

The nationwide boost in employment – the 13th in 14 months – will be treated as a mixed blessing by the Reserve Bank.

“The jobs market is likely to soften in coming months, but at the current time its clearly in great shape,” said CommSec economist Craig James.

“The Reserve Bank will no doubt be restrained in its celebrations, worried that the tight conditions could drive up wages. It certainly doesn’t need to be in a rush to cut interest rates.”

JP Morgan economist Stephen Walters agreed, saying the news showed that the Australian economy was “not, after all, on its knees”.

“It is not in urgent need of resuscitation. We expect the Bank to delay the next rate cut until December.”

BT economist Chris Caton said the news was consistent with this week's reports of a rebound in consumer confidence and retail sales.

“This doesn't mean that things are rosy; only that there is no reason to use that other “R” word – recession,” he said.

“There almost certainly are more rate cuts in the pipeline, but the chance of one next month is now less than 50%.”

Every state other than NSW and South Australia recorded an increase in jobs last month. NSW has by far the worst unemployment rate in the nation at 4.9%. Victoria's has improved from 4.6% to 4.3%. Western Australia has the lowest unemployment rate in the nation at 2.8%.

The Treasurer Wayne Swan described the employment figures as “solid” and said he was confident that the Bureau of Statistics cutbacks had not made them inaccurate.

“I rely on the accuracy of the Bureau like everyone else does, and the statistician vouches for these figures. So I think people can make up their own mind,” he said.

But Westpac economist Anthony Thompson said the cutbacks had made the figures much less reliable.

While the Bureau of Statistics reported that the total number of Australians with jobs had increased by a seasonally adjusted 16,600 he could only be confident that the true result was somewhere between a slide of 45,800 and and a increase of 120,800.

“The month by month changes are volatile and noisy,” he said.

Employment growth has slowed to 12,200 per month this year from 21,900 per month last year.

Most of the new jobs are being created in mining and farming, with employers in construction, retail and manufacturing industries shedding jobs.

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Beyond satire

NSW. The latest update.

Why oh why didn't we kick out this government on either of the last two occasions when we had a chance?

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Happy days are here again - for some of us

Suddenly we're optimists again. Or at least half of us are.

The combination of tax cuts, interest rate cuts and lower petrol prices appears to have brought on a surge in consumer confidence in the past month - amidst a certain type of consumer.

Men are feeling very good – perhaps because they've got more of the tax cuts than have their partners.

For the first time in a year more of them feel good about the economy than feel bad, albeit by a small margin. Optimistic men outnumber pessimists by 0.08%.

By contrast the latest Westpac Melbourne Institute survey suggests that women feel overwhelmingly negative...

...with pessimistic women outweighing optimists 15.7 per cent.

Both genders report feeling better after the interest rate cut - but men by 9.7% and women by 4.6%.

There's a similar divide when it comes to home ownership. Australians who have already paid off their houses weren't much moved by this month's interest rate cut, feeling just 2.4% more confident. But Australians still tied to a mortgage jumped in confidence 10.8%

Westpac's chief economist Bill Evans described the result as "remarkable". Consumer confidence soared 7.0% in September after jumping 9.1% in August – a compound jump of 16.7% - one of the biggest this decade.

The London-based strategist at TD Securities, Stephen Koukoulas says the resilience fits in with other data that suggested that the Australian economy will now not be heading into a recession he feared.

But it suggests that the Reserve Bank's program of interest rate cuts will be more muted, "certainly less than the market currently has priced in".

"With consumer sentiment on the rise and with it, consumer spending likely to increase, demand may well underpin price pressures.

Inflation may well stay sticky. As a result, interest rate cuts will be small and infrequent," he says.

The Treasurer Wayne Swan said while he welcomed the boos in confidence Australians should not get "too excited".

"It is only one figure, but it does highlight the benefit to family budgets of the tax cuts we delivered and of course this month's interest rate cut."

Middle income earners appear to have been the most cheered by the tax and interest rate cuts, boosting their confidence by 22.5% in September. By contrast Australians earning above $60,000 were only 4% more confident and Australians earning less than $40,000 were 7% more confident.

Most of the change in sentiment relates to feelings about the future. When asked whether not was the right time to buy a major household appliance only 33% of those surveyed said yes. 45% said no.

Other figures released yesterday show that new borrowing fell 1.3 per cent in July, it's sixth consecutive monthly fall.

But the confidence survey provides grounds for optimism about future borrowing.

41% of Australians surveyed in felt that now was the right time to buy a house, up from 32% in June.

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Lots of prizes!

Yep! It's one of the really bright ideas in the Cutler Innovation Review, named Venturous Australia.

It's in the excellent Chapter 7:

Recommendation 7.1: The Australian Government should experiment with the use of prizes to stimulate innovation. funding should be modest - say $5 million over two years with an external evaluation after three years.

What's so bright about the idea?

Patents (meant to stimulate innovation) are turning out to stifle it.

They are being granted for ideas that once wouldn't have been patentable, where they stop innovation until the patent expires.

"In the words of Sir Isaac Newton, we stand on the shoulders of giants. Because new knowledge always builds on old knowledge, the property rights we have erected to encourage innovation can actually obstruct it."

The report wants intellectual property treated as an economic, rather than a legal question. "It should make the same transition as competition policy did in the 1980s and 1990s to being managed as such."

Just as we began examining import protection on its economic merits we should begin examining IP protection on its economic merits.

But prizes as an alternative?...

Well think about what people will do to get a knighthood, or an Order of Australia.

In Queensland, some of them did a lot.

According to a study of the International Who's Who Australia is one of the top 5 countries in the world for awards per head.

But using them instead of patents?

The US Senate is/was considering The Medical Innovation Prize Fund Act of 2007.

The idea:

"The level of funding for medical innovation prizes would start at $80 billion per year, and increase with the growth in GDP..

The patent system would still be used, but the patent owners would no longer be given monopoly rights to control the manufacturing and sale of products. Instead, patents would be used to establish who "owns" the right to the cash rewards given for new inventions. Drugs developed without patents would also be eligible for the prizes."

HT: Marginal Revolution

A new book called Against Intellectual Monopoly argues that the patent system was rotten from the start.

The authors say James Watt, inventor of the steam engine was a "scoundrel" who with his politically-connected partner Matthew Boulton used the patent system to crush their innovative opposition and delay the industrial revolution.

"During the period of Watt's patents, the United Kingdom added about 750 horsepower of steam engines per year. In the thirty years following Watt's patents, additional horsepower was added at a rate of more than 4,000 per year. Moreover, the fuel efficiency of steam engines changed little during the period of Watt's patent; however between 1810 and 1835 it is estimated to have increased by a factor of five."

HT: MR. Some dispute this.

A prize for his really bright idea might have been better.

Joshua Gans proposed them in his submission to the review.

John Quiggin and Dan Hunter touch on some of the ideas in a paper entitled Money Ruins Everything.

Here's something else from Chapter 7 of Venturous Australia:

Box 3: Some examples and principles of targeted transparency

In their book Full disclosure: the perils and promise of tranparency American scholars Archon Fung, Mary Graham and David Weil outline a range of regimes that mandate disclosure to consumers which were designed to improve information flows. The two most successful examples of what they call ‘targeted transparency’ demonstrate the link between good information flows, demanding customers and innovation.

Los Angeles required restaurants to display prominently on their front window the rating they had received for hygiene from the government regulatory regime. Importantly the rating was to be displayed as a simple ‘A’, ‘B’ or ‘C’ classification which was easily understood by consumers.

With this information so prominently available to consumers, consumers were more easily able to demonstrate their preferences. Virtue in such matters became its own reward; and perhaps more pointedly, vice became its own punishment. The public’s unsurprising distaste for bad hygiene kicked off a vigorous race to the top with restaurants striving to move up the ladder, particularly from a ‘C’ grading with a range of beneficial impacts, not least lower admissions to hospitals for food poisoning.

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An innovative innovation revew?

We'll see

The Innovation Minister Kim Carr will releases the Review of the National Innovation System in Melbourne at 2.30pm.

The members include Terry Cutler, Nicholas Gruen (well-known to readers of this blog), Steve Dowrick of the ANU, and Glyn Davis, the co-convenor of the 2020 summit - so it might be good.

"The review has made a broad range of recommendations including innovation in business, strengthening people and skills, excellence in national research, information and market design, and taxation."

It'll be here.

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"Being debt free sounds terrific . . .

...until you ask the economists’ question: at what cost?”

Nicholas Gruen with an excellent column in today's Financial Review.

It's about how NSW Labor dug its own grave.

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The thoughts of Governor Stevens

On the two interest rate rises earlier this year:

“I don’t think they were unnecessary. I think they had to be done.”

On rate cuts to come:

“I can’t come here and precommit or make a forecast about what the board’s going to do in forthcoming meetings.”

On recession:

“I think it would be dishonest to deny that there’s any possibility at all of recession. There's clearly some probability of that.”

On working families:

“I think it’s been tough for many of them, particularly those that are indebted.”

On the banks:

“To be frank I think it is unlikely that the banks will volunteer reductions in loan rates independently of the Reserve Bank lowering the cash rate.”

Details follow...

Australia’s Reserve Bank Governor has evoked the concept of a recession while warning that Australia’s unemployment rate is set to increase to well above 5%, adding an extra 100,000 people to the unemployment queue.

In his first appearance before the parliament’s economics committee since cutting interest rates by 0.25 per cent last week Governor Glenn Stevens said the banks; future decisions would be about whether to cut rates further, not whether to raise them.

“We have moved from a phase where the question was whether we had done enough to make sure inflation will come down over time, to one where the question will be whether we hold rates here or go down even more,” he told the Melbourne committee.

Asked whether the Reserve would be cutting rates again Mr Stevens replied that he did not want to pre-empt decisions to be made by his board, adding that the financial markets had priced in further cuts and that he had “no particular agenda to either dissuade them or encourage them any further”.

Although inflation would continue to rise, the battle to contain it had been won. It would begin falling within six months after peaking at 5%.

The challenge for the Bank would be to ensure that it brought about a soft rather than a hard landing.

“I think it would be dishonest to deny that there is any possibility at all of recession,” the Governor said.

“There is clearly some probability of that.”

“The risk of recession is not zero, but the most likely outcome is a gradual slowdown.”

Australia’s unemployment rate, at present 4.3%, should begin climbing within months.

Asked how high it would climb the Governor replied that Australia’s economic situation was similar to the “mid-cycle pause” of 2001.

“In that episode the rate of unemployment rose by a percentage point or so over the next year to 18 months,” he said.

An increase in Australia’s rate of unemployment from 4.3% to 5.3% would add more than 100,000 Australians to the unemployment queue, boosting the number of unemployed from 471,000 to around 600,000.

The number of Australians with jobs would continue to climb, although much more slowly than the number of people wanting work.

As the Governor addressed the committee the ANZ Bank revealed that its survey of job advertisements had recorded its biggest monthly side since 2001, collapsing 4.9% nationwide and by 7% in Victoria.

The Dunn and Bradstreet survey showed that business executives expected conditions to decline further in the December quarter.

The Governor said that consumer and business confidence had not “collapsed” but was merely low.

“What I would say about the Reserve Bank board is that these people that are pretty well plugged in to the business community, and I have not heard them speak of a collapse in confidence at all, in any of the discussions we have had, he told the committee.

“Perhaps they should get out more, Governor,” Steven Ciobo, the Opposition's small business spokesman said.

"I think they get around a fair bit," Stevens shot back.

The Governor said that Australian businesses appeared to have “enough confidence to have planned an enormous upgrade in investment spending.”

“I suspect that not all that investment will get done. It probably can’t get done actually. It would be too much for the economy to handle. But top me those plans do not seem consistent with a collapse in confidence.”

Told of a survey that rated Australian consumer confidence the second-lowest in the Governor said he did not think that was right.

“I myself think there are grounds for a fair bit more confidence in Australia than there are in the US, the UK or in most of mainland Europe,” he told the committee.

Mr Stevens said that in one respect the US sub-prime mortgage crisis had been good for Australia. It stopped the same sort of thing happening here.

“Some fringe players in the Australian mortgage market had lending standards not as bad as in the US, but they were prepared to take more risk.”

“Had this gone on for five more years we would have had more such lending.”

“I suppose it is in some way fortunate for Australia that US lending standards fell over when they did from that point of view,” he said.

While some Australian banks would be able to cut their rates independently of the Reserve Bank, he was not expecting them to.

“It's their call, but it doesn't strike me as likely,” the Governor said.


The reserve Bank Governor Glenn Stevens has nominated 3% as Australia’s economic speed limit telling the Parliament’s economics committee that demand growth faster than that is not sustainable.

“The economy’s potential to supply things probably rises at about 3 pc per annum,’ he told the biannual committee hearing in Melbourne.

“If demand is rising at 4% or 5% or 6% as at various years it has, sooner or later you are going to reach the point where you are stretching that supply capacity.”

“You want to grow above trend to use up the capacity when it is idle, but once you’ve done that you have to slow it down to the economy’s medium term growth in potential supply.

“It has to have a ‘3’ in front of it. You can’t have demand growth of 5% without a problem on inflation.”

Non farm economic growth had slowed to an annualised pace of about 2%.

“Our feeling is still that the low point will be lower than that. You can’t grow above average indefinitely,” he told the committee.

Economic growth was slowing rather than turning negative, and its composition had changed.

“Household consumption is probably a little weaker, investment is a little stronger and public spending is a little stronger than we had assumed some months back.

“GDP growth is if anything slightly higher than it seemed as if it would be some months back, although I think we’ll still get to the same low point in growth. “

“Maybe it will take a quarter or two longer than it would have.”

The Reserve Bank was reacting to the impending slowdown by cutting interest rates ahead of time.

“If you want to change lanes in you car you apply a bit of steering, but once you are heading in the right direction you straighten up,” the Governor said.

“If the economy is slowing you don’t push it down and down.”

“If you wait for the your target to be evidentially achieved before starting some adjustment you have waited too long.”

Mr Stevens said the global slowdown would on balance be good for Australia.

“At this point we would be considering the below average growth in the world economy - not a complete crash - quite helpful for dampening prices.”

He did not expect the slowdown to have too much effect on China.

“It is true that Chinese economic growth is slowing somewhat. They wanted to slow and they have done it because there has been evidence of overheating.”

But the resources that Australia sold China would continue to be in demand.

“If you visit China you will see the iron ore we sell in the enormous infrastructure that they are building.”

“My guess is they will continue to do that for some time, and if the economy slows too much they will adjust things and speed it up.”

The Governor said that this did not necessarily mean that commodity prices would climb further. Metal prices had already fallen and spot prices for coal were coming down.


Tim Colebatch: Glenn Stevens makes an unlikely optimist.

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Governator Stevens

Here are his opening remarks to the parliamentary hearing in Melbourne, still under way.

The interrogation is live on the web until 12.00pm.

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There are two Australias alright

When the Reserve Bank Governor Glenn Stevens appears before the parliament's economics committee in Melbourne this morning he is likely to be asked about the divide between the “two Australias” – the states that benefit directly from the resources boom and those that do not.

He is less likely to be asked about a more embarrassing divide – one that neither Labor nor the Coalition is keen to air publicly.

It's the divide between the Australia that earns its money from wages and Australia that gets its money from profits.

Last week’s National Accounts show that the gap is wider than ever before.

Only 52.4% of Australia’s income flowed through to workers in wages and superannuation in the June quarter – the lowest proportion since 1965. By contrast the share of income pouring into profits hit 28.4% - an all-time high.

Back three decades ago more than 60% of national income was paid out in wages and only 17% in profits...


The graphs presented in the National Accounts show that the relative collapse in wages and the explosion in profits has been particularly rapid since the start of this decade.

This doesn't mean that the buying power of wages has fallen – at least not until the recent slide in the dollar and the jump in petrol prices.

Employment specialist Bob Gregory from the Australian National University says all but one group of Australians has enjoyed increased buying power. The group that has missed out is the unemployed. Unemployment benefits increase only at the rate of inflation. Most other benefits and wages have increased faster.

But Professor Gregory says another group of Australians has enjoyed extraordinary increases in their incomes. They're the Australians who were already at the very top of the scale.

“I am not taking about top 20% or the top 10% - it's the top 1% to 2%. They've raced ahead. It's no longer that important to focus on who's getting left behind, and its no longer sensible to look at average incomes. Those are the very top are distorting the average. They've income has soared.”

They are the Australians enjoying the biggest access to company profits.

La Trobe University economist Don Harding believes that other Australians are starting to notice.

“I think the November election result was partly about this. People know that they are not getting access to the prosperity they are told is around them. There’s the same restive feeling in Western Australia right now. That state is in the middle of an enormous mining boom, but ordinary West Australians are finding it hard to buy houses.”

Professor Harding’s proposed solution is radical – a super tax on profits to put a greater share of Australia’s income back into the hands of working people.

“Why should the big benefits of Australia’s resources windfall go to people who are shareholders – many of them foreigners?”

“One thing would be to tax those profits more highly through a Resource Rent Tax and give the money back to working Australians through the tax system, so that they do alright out of the resources boom – otherwise they might not.”

“The people behind the government’s Tax Review have this funny idea about tax competition – that we need to keep our corporate tax rates low because otherwise businesses will move offshore, but at the current profit rates our mining businesses won’t.”

Professor Harding’s argument is a mirror image of the one about the “real wage overhang” that dominated Australian economic discussion during the 1970s and 1980s. Then the share of Australian income devoted to wages was said to have climbed too high. It needed to be brought back in order for business owners to feel that they were getting properly rewarded.

“The Accord between the Hawke government and the unions was a big part of getting the wage-share down,” says Professor Gregory.

“Real wages were held back to allow the profit share to grow. Then the Howard government took things further by industrial relations changes that weakened the role of unions.”

There has been a similar trend overseas.

“It’s happening internationally. One view is that, worldwide, the labour market has moved against unskilled men. Another is that the businesses doing well happen to be the capital intensive ones.”

“In Australia the Treasury says that were it not for mining our wages share would not be declining much. Mining is capital-intensive. If tomorrow you doubled the money you poured into mining and its profit rate was fixed you would expect profits to soar. That’s what’s happening - we have high profits in mining and money pouring into it.”

A record share of national income going to profits and a historic low going into wages is not something about which a Labor government is likely to boast. Although it didn’t mention it on Budget night, its budget forecasts show the wage share falling even lower.

Some of it a statistical aberration. Some workers who once called themselves wage earners now call themselves contractors. Many previously unincorporated businesses whose income was not recorded as profits have now incorporated as a result of the new tax system.

And there are plusses to low wages relative to profits. They make workers relatively cheap to take on and put a floor under unemployment.

Also, compulsory superannuation has made every Australian worker a profit-earner as well.

“If every worker was capitalist you wouldn’t be that worried about the wage share and the profit share,” says Professor Gregory.

“And with superannuation these days every worker with a long-term commitment is a capitalist.”

“But some are much bigger capitalists than others. They’re the ones doing extraordinarily well. Big changes are taking place and no-one really understands them.”

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The Real Rupert?

I've been fascinated by Rupert Murdoch for as long as I can remember.

I have read many many books about his life - which seems to never end.

The best is Bruce Page’s The Murdoch Archipelago.

Murdoch is presenting this year's ABC Boyer lectures in November.

Now a new biography is underway, written by Michael Wolff with full cooperation from (but no vetting by) the man himself.

Vanity Fair have published this teaser:

"For nine months, I’ve been interviewing Rupert Murdoch, in an unlikely spirit of openness precipitated by his great satisfaction in having bought The Wall Street Journal, about journalism, his business, politics, his family, and the future for a new biography.

I was warned about his charm by many other journalists—warned not to fall victim to it. So the surprise was his lack of it. He’s without introspection and self-analysis and doesn’t like to talk about the past. What’s more, he mumbles terribly (and with a heavy Aussie accent) and seldom finishes a sentence.

But his odd lack of seductiveness or felicitousness—contributing to his aura of villainy—became after a while alluring in itself. There’s no spin, because he really can’t explain himself. Rather, what you see is what you get. He’s transparent. The nature of the beast is entirely evident.

One morning when Leela and I arrived at Murdoch’s office for another interview session, we found the 77-year-old News Corp. chairman and C.E.O. hunched over the phone reporting out a story. He’d been out the night before and gotten a tip. Now he was trying to nail it down. His side of the conversation was straight reporter stuff: Who could he call? How could he get in touch? Will they confirm? Barked, impatient, just the facts.

Here was the old man, in white shirt, singlet visible underneath, doing one of the same basic jobs he’d been doing since he was 22, having inherited the Adelaide News in Australia from his father. And he was good at it. He was parsing each answer. Re-asking the question. Clarifying every point. His notepad going. He knew the trade. Of how many media-company C.E.O.’s could that be said? This wasn’t a destroyer of journalism—this was a practitioner.

On the other hand, he was trying to smear somebody..."

Well worth reading.

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Iemma's downfall

Some wiz on YouTube foresaw the whole thing back in June.

It's worth watching again this afternoon while reading the Saturday papers and marvelling at the wonder that is NSW.

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Ganaut's (newest) bright idea

Convergence.

We should be aiming for one carbon emissions entitlement per person.

This would mean that China, India etc. could continue to expand emissions (right now they are way below us in emissions per person) until they reach the level we will have reached as we wind back our emissions per person.

Because Australia has (and will keep having) a strong immigration program - our absolute emissions reductions targets would not be as tough as for European countries.

At the Press Club he said it was the only way forward. Convergence. One carbon emissions entitlement per person.

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Garnaut: Lets want 400, argue for 450, go for 550, and if we don't get it, charge for carbon emissions anyway

The table in today's just-released Garnaut Report update sums it up:


"Australia should put its strongest possible efforts into securing a global agreement to limit emissions to no more than 550 parts per million CO2-e and encourage the world onto a lower emissions path as soon as feasible.

450ppm or lower would suit Australian interests better than a 550ppm goal.

However, the Review has reluctantly concluded that international agreement on a global goal of 450ppm is not immediately feasible, given that emissions are currently around 455 ppm CO2-e and rising rapidly due to fast global economic growth.

The path to an ambitious objective of 450ppm, or lower, is through early progress on 550ppm.

Based on a 550ppm outcome, Australia’s share of the burden would be a 10 per cent reduction (or 30 per cent in per capita terms) by 2020 and an 80 per cent reduction (90 per cent per capita) by 2050 over 2000 levels.

If a 450ppm scenario were adopted, emissions would need to be reduced by 25 per cent by 2020 (40 per cent per capita), falling to 90 per cent by 2050 (95 per cent per capita).

During the period from 2010 – 2012, in which Australia would continue to work within its Kyoto commitment, permits would be sold starting at $20 in 2010, rising each year by 4 per cent plus the percentage increase of the consumer price index. "

He's on at the National Press Club now! ABC1 until 1330.

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Believable statement?

Wayne Swan in parliament yesterday, defending his tax cuts this way:

"We anticipated, in our Budget, what is now occurring – we were prepared for the challenges now unfolding, and we got it right."

Tim Colebatch writes:

Hang on, Wayne. Wasn't the issue that you'd promised the tax cuts in October, and felt bound to deliver them? If you knew in October that within months, the economy would be going backwards per head, why didn't you warn us?

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The strange case of the tax hike that exists, but doesn't

Curious, and arguably extra-legal

Intending buyers of luxury cars hoping to escape the tax hike will have to cool their heels.

Although the Senate rejected the budget measure yesterday, the government's decision to reintroduce it when the Senate next meets means that car dealers are under notice that the extra tax may still have to be paid.

The Age understands that the Tax Office will write to the dealers warning them that should the bill eventually pass they will be liable to pay the increased tax on every luxury car sold since July 1...

They will get no respite in the period between the Senate rejecting the bill and it eventually passing.

The Tax Office wrote to dealers in June warning them to prepare to pay the increased tax on every car sold from July 1 even though the measure's progress through the Senate was not assured.

Its follow-up letter will reiterate that advice.

Some dealers have been collecting the increased tax from their customers on the understanding that they will refund it when the Tax Office advises them that it is safe to do so.

Other dealers have been entering into sale contracts that allow them to collect the extra tax later should the bill be passed.

A third group of dealers has been absorbing the potential tax increase and will pay it out of their own resources if they are eventually required to.

So far none of the extra tax collected by the dealers has been paid to the Tax Office.

Industry estimates suggest that $15 million to $20 million would have been owing had the legislation been passed by the Senate.

The total is growing at the rate of $2 million a week.

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Let’s look at the bright side.

Australia has just recorded its 17th consecutive year of economic growth, a result without president.

There’s every sign we’ll reach an 18th.

Sure, the rate of economic growth has slowed, but the important thing is that it is continuing.

State governments such as Victoria’s have embarked on very big capital works programs to help, and the rest of the world has helped by boosting our buying power by an extraordinary 13% in just 3 months.

And the growth is becoming more manageable. The National Accounts suggest that inflation may have peaked. Wage costs are falling relative to profits, suggesting that the jobs fallout of any slowdown is unlikely to be too bad.

Any problems we’ve got are the sort of problems our fellow developed economies – among them New Zealand, the US, the UK and Japan – would sell their souls to have...

The challenge for our Reserve Bank and for the government is to work out how to keep economic growth going all by themselves.

Neither other countries nor our own history can provide any guide.

We literally moved beyond history some time ago. History would have dictated a recession at the start of this decade, just as there was a recession at the start of the 1990s and the 1980s.

Having escaped our decade-long cycles of boom and bust our economic managers need to manage for the future in way they never had to.

It’ll mean relying on evidence rather than trends and being prepared to adjust rates down, or up, or not at all as needed.

No-one can predict what the Reserve Bank will do next, because at the moment it itself doesn’t know.

Immediately it’ll scour next week’s employment and retail trade figures for clues.

The retail figures will be particularly important.

That’s why it’s a pity that the Australian Bureau of Statistics has decided to butcher them. In order to save an estimated $700,000 it’s going to cut the number of firms it surveys each month by 30 per cent.

It revealed yesterday that it expects the margin of error in next Tuesday's figures to increase by 40%.

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Australia's unlikely engine room

Victoria has emerged as a surprise engine room of the Australian economy with the latest figures suggesting that it was responsible for almost half of the nation’s economic growth in the June quarter.

The National Accounts show that Victoria contributed 0.4 percentage points to domestic demand growth in the quarter (p7), almost half of the nationwide total of 0.9%.

Western Australia, previously Australia’s economic powerhouse, contributed a smaller 0.3 per cent.

NSW became a drag on the nation’s economy in the quarter as its economic activity contracted 0.1 per cent.

Victoria’s Treasurer John Lenders hailed the news saying it reflected strong growth in private business investment, in housing investment and in public investment.

Australia’s Treasurer Wayne Swan described the national result as “ a solid number, especially considering the global challenges that we are facing and what is happening elsewhere in the developed world”...

Australia’s economy grew by 0.3% in the June quarter, well down on the 0.7 per cent recorded in the previous quarter but enough to generate a respectable annual growth rate of 2.7%.

While consumer spending dipped slightly losing 0.1 per cent in its first decline in 15 years, business investment surged, climbing 4.6% in the quarter while public investment - much of it by state governments - climbed 2.4%.

“Growth is rebalancing away from household consumption towards business investment and exports. It’s in line with the Reserve Bank’s script,” said TD Securities economist Joshua Williamson.

“It would be hard to conjure up a better result. It’s a fantastic report card,” said Commsec economist Savanth Sebastian.

“For the Reserve Bank it will be pleasing. It confirms the economy didn’t fall off a cliff,” said ANZ economist Katie Dean. “By itself it won’t trigger an October rate cut.”

Some parts of consumer spending were quite badly hit in June quarter, especially spending on transport which slipped 2% in real terms as people took fewer trips in response to the higher price of petrol.

But the income available to Australians kept rising. The accounts show that Australia’s terms of trade, a measure of international buying power, soared 13% – the biggest quarterly boost in 35 years.

The statisticians preferred measure of economic welfare, “real net national disposable income,” climbed 3.6 per cent in the quarter and 6.6% over the year as a result of the improved terms of trade.

More of the extra income flowed through to profits than wages with profits hitting a record 28.4% of national income and a broad measure of wages sliding to 52.4%, its lowest level since 1965.

Mr Swan said that Australia seemed to be “defying gravity” with five of its fellow developed economies recording zero or negative growth in the same period. Japan was down 0.6%, Germany 0.5%, France 0.3%, Italy 0.3% and the UK zero.

“That’s what’s going on elsewhere in the world. While growth has stalled or gone backwards in the world’s largest developed economies, we still have it,” the Treasurer said.

The Shadow Treasurer Malcolm Turnbull said the results were a tribute to the resilient economy bequeathed to Labor by the Coalition.

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The Rate Cut Commentators

Gittins: YOU beauty! Interest rates have been cut and happy days are here again. For good measure, we've even got petrol prices coming down.

Sorry, don't be too sure about that. The Reserve Bank has cut its official interest rate only because times are getting tougher.

McCrann: YESTERDAY'S Reserve Bank interest rate cut might seem exactly like all the others that have started a 'rate-cutting cycle'. To think that though, would be to make a very dangerous mistake.

It is like no other. Certainly not like 2001, the last time rates were being cut. Even less like mid-1996, at the start of the Howard-Costello era.

Mitchell: INTEREST rate cuts rarely come in ones, and yesterday's monetary policy easing is likely to be the first of several over the coming months.

But with the economy buffeted by both a terms of trade boom and the global credit crunch, the timing of the easing cycle will be decided one month at a time.

Stutchbury: HAVING done it once for the first time in seven years, the Reserve Bank will do it again in the months ahead.

But just don't expect the central bank's seven-year itch to produce further quick and deep cuts to official interest rates.

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A follow-up cut? Maybe not.

The punters in money markets have a saying. Interest rate cuts are like cockroaches – there’s never just one of them.

Late yesterday they were backing their intuition with money.

The prices on the futures market suggest they’re expecting an extra three interest rate cuts over the next 12 months, bringing about a total cut in interest rates of 1.00 percentage points – some $175 per month.

But that’s not how the Reserve Bank sees it.

It has moved rates once, and once only, before. It most recently did so with its solo rate hike in 2005.

It’s aim, as spelt out clearly in the final sentence of its seven-paragraph statement is to “bring inflation back to its 2-3 per cent target over time”.

If Australia was a car the Reserve Bank’s foot would be on the brake pedal. On Tuesday it eased the pressure on the pedal somewhat, but importantly kept its foot there...

If the car speeds up too much it’ll put its foot down again. It has no plans to lift its foot and freewheel.

It’ll get a reading on the speed of the economy this morning [WED] with the release of the Australian National Accounts.

Only if they show the economy seriously slowing will it ease the pressure on the brake again.

Private forecasts suggest that Australia’s economic growth will have slowed to 0.4% for the3 quarter and 2.9% through the year – well below the recent pace of 3.6% but not seriously below the long-term trend of 3.25%.

It’ll be a better performance than nearly every other developed economies. The US, Japan, Germany and the UK all have near zero growth or going backwards.

Whether today’s news will worry the Reserve Bank enough to cut interest rates again (or put differently – will give it enough confidence that it can safely cut interest rates again) may become apparent on Monday.

That’s when the Bank’s Governor Glenn Stevens fronts up to his half-yearly interrogation by the House of Representatives economics committee.

This one will be in Melbourne, open to the public at 9.00am at the Dallas Brooks Hall. The politicians are likely to want answers.

The smoke signals coming from the Reserve suggest that right now it genuinely doesn’t have them. In its words, the outlook is surrounded by “considerable uncertainty”.

It knows that our confidence and our spending have been hit, but it also knows that they can rebound quickly.

It takes very seriously its responsibility to get inflation back to the target zone of 2% to 3%, and short of bringing on a recession, it will do whatever it can to make sure it gets back there.

Should this interest rate cut make us too confident, too eager to rush out and spend and push up prices and make that 2% to 3% target recede into the distance, this interest rate cut will be the last.

Not for the first time the financial market punters will have got it wrong.

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Who wins from lower rates?

The losers are hard to find

There are around 7 million households in Australia. Only 2.5 million will benefit directly from the cut in mortgage rates.

At the 2006 census another 2.5 million owned nothing on their homes. Another 2 million were renting.

This larger group will receive no direct benefit from the cut in mortgage rates. For some, of them it’ll eat into the income they earn from their bank.

But their pain can be overstated. These days a surprising number of Australians earn money from corporations. They are part owners, either through the share market, through managed funds or through superannuation funds.

They’ll benefit as a result of those corporations finding it cheaper to borrow and that benefit is likely to bolster the share price and dividends of those corporations by more than it harms their earnings from deposits.

And in any event deposit rates are still high...

It’s still possible to earn 7.5% if you put in $5,000.

The Treasurer is right to say that the Reserve Bank’s cut is “very welcome news for Australian families and the Australian economy.”

But it carries with it risks.

The last time interest rates were cut in late 2001 new homebuyers rushed to the banks and pushed up new home loans 20 per cent. Home prices took off and took years to cool down.

The then Treasurer Peter Costello welcomed the cut by saying it would “represent a saving on a $100,000 loan of about $20 a month”.

That’s right - a $100,000 loan. House prices were tiny then.

Today’s cut will save a typical Victorian mortgage holder owing $256,600 around $44 a month.

If it does ignite another house price boom it’ll end up hurting renters and encouraging yet another shift in wealth to Australians who already own or are buying houses.

That’s possibly one of the reasons why the Reserve Bank is taking things very gently this time. There’s nothing in its statement to suggest that there will be an automatic follow-up cut.

Another reason might be the Australian dollar. It plummeted an extraordinary 2 cents yesterday on the back of the Reserve Bank’s move and weaker commodity prices. The bank will be watching the dollar and its likely effect on inflation closely.

In Reserve Bank language, its future actions will be “data dependent”. If this interest rate cut causes a problem there won’t be a quick follow up.

For the moment most households have something to celebrate – even many who think they don’t. Home loans are cheaper, corporate borrowings are cheaper, petrol is much cheaper (until the lower dollar kicks in) and tax cuts and improved childcare rebates have given most wage earners more take home pay.

It’s hard to find too many losers.

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The announcement

It's here

Australia’s Reserve Bank has signalled that its latest interest rate cut – the first in 7 years – could be a one-off as a plummeting Australian dollar has injected new uncertainty into Australia’s economic outlook.

The dollar slid two complete US cents to fell below $US0.84 for the first time in a year on the back of both sharply falling Asian oil and gold prices and the Reserve Bank’s interest rate decision.

The Reserve Bank’s cut in its cash rate of 0.25 per cent announced at 2.30pm and was backed up within minutes by each of the private banks.

The ANZ announced a 0.25 per cent cut in its mortgage rate at 2.36pm; the Commonwealth and Westpac at 2.37pm, and the National Australia Bank at 2.39pm...

Westpac’s cut will come into effect tomorrow The National Australia Bank’s on Friday and the ANZ and the Commonwealth’s on Monday.

For a Victorian with the average mortgage of $256,600 the saving will be $44.16 a month or $530 a year.

The Treasurer Wayne Swan welcomed the banks’ response after being passed a note in Parliament, declaring that he had made it “very clear indeed” that he expected the banks to pass on the cut in full in a reasonable time.

The Reserve Bank’s move was “very welcome news for Australian families and the Australian economy and good news which should be celebrated by all in this House”.

The Shadow Treasurer Malcolm Turnbull said the move was a response to a collapse in consumer and business confidence that had followed the November election. He asked whether it was the result of “the slowdown we had to have”.

The Reserve Bank’s statement gives no hint that it will follow up the cut, stressing the importance of bringing inflation back under control rather than the importance of keeping the economy growing.

Notably absent from the statement is the commitment to “make adjustments as required in order to promote sustainable growth” that was present in the Bank’s August statement.

Instead the statement speaks only about the need to
“set monetary policy as needed to bring inflation back to the 2-3 per cent target”.

The Board’s members are believed to feel that there was no case for the bigger rate cut of 0.5 percentage points suggested by the Leader of the Opposition and that there is no case at the present time for a further cut.

The statement said that the Reserve Bank had set out to restrain demand in order to contain inflation and that its rate increases as well as tighter credit conditions and higher fuel costs had “exerted the needed restraint”.

While the rise in Australia’s terms of trade was working in the opposite direction, “adding substantially to national income and ability to spend” on balance it was likely that overall economic growth would slow and that inflation would decline over time - provided wage growth remained contained.

The cautious statement suggests that the first cut in seven years may well be a one-off for the moment just as the sole rate hike in 2005 wasn’t followed up for more than a year.

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The second GROCERYchoice survey is out

Check out your prices here

The ACCC says:

"Coles supermarkets are the cheapest in 40 of the 61 regions surveyed. This compares with 52 of 61 regions in the inaugural GROCERYchoice survey.

Further, on a national basis, the price difference between Coles, Woolworths and independent supermarkets has narrowed.

ALDI remained the cheapest for a basic staples basket.

The survey results are issued on the first business day of each month."

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Today's the day!

Australia’s Reserve Bank is expected to deliver mortgage relief more than two million households today with many mortgage payments expected to be $40 per month lower by the day’s end.

The expected cut in the Reserve Bank’s cash rate of 0.25 percentage points will be the first in seven years.

In another first the Bank will announce the move during the middle of the Parliament’s question time – at 2.30pm.

Minutes later two of the big banks, the National Australia and the ANZ are expected to apply the cut to their standard variable mortgage rates. They have already undertaken to do so.

The move would cut the ANZ’s standard rate from 9.67% to 9.42% and the National Australia’s standard rate from 9.61% to 9.36%...

A third, the Commonwealth Bank, has promised to “do our best to pass on as much as we can to our customers”.

On Sunday the non-bank lender Wizard got in early cutting its standard variable mortgage rate by 0.25 percentage points to 9.29% ahead of the Reserve Bank move.

The 0.25 percentage point cut expected from the Reserve would cut the repayment on a $250,000 mortgage by around $43 per month if fully passed on.

The Treasurer Wayne Swan yesterday stepped up pressure on all of the banks to pass it all on saying that if the banks didn’t they would be “challenging the authority of the Reserve Bank and the authority of the Governor, and that’s a challenge to the authority of monetary policy.”

He had directed the Treasury to “have a good look at all competitive aspects of the market”.

The Opposition Leader Brendan Nelson called on the Reserve Bank to cut by twice the expected 0.25 percentage points saying there was “every justification for rates to be cut by half a percentage point”.

But when asked whether he would provide advice to the Bank in the same terms if he became the Prime Minister he said he would not.

“I am the Leader of the Opposition, and in that sense, somebody has to stand up for Australians, for Australian workers, Australian businesses,” he said.

In Parliament the Prime Minister Kevin Rudd savaged him for introducing a “new Nelson doctrine - what I say in opposition has nothing whatsoever to do with what I do in government”.

“How can the Leader of the Opposition stand credibly in the parliament when he goes out and says that the Reserve Bank should take a particular course of action and, in the same breath, say that if he were Prime Minister he would not say that or do that?”

The Reserve Bank board will make its decision this morning after receiving a briefing from Bank staff about the state of the Australian and international economies.

The minutes of its previous meeting concluded that “less restrictive conditions could soon be called for,” warning that “otherwise the risk of a deeper and more persistent slowing in the economy would increase”.

Under new procedures introduced after the November election the board’s move will be announced at 2.30pm, which for the first time will be in the middle of the Parliament’s question time.

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We should be so lucky - the first rate cut in seven years

Kylie fan Shane Wright in today's West Australian takes us back to December 2001

Seven years ago, Kylie Minogue launched her comeback single Can’t Get You Out of My Head.

Seven years ago, Peter Costello was an ambitious treasurer destined to become Prime Minister.

A barrel of oil could be bought for less than $US20 and inflation was running just above the Reserve Bank’s 2 to 3 per cent target band.

And it was seven years ago, on December 5, 2001, that the Reserve Bank last cut official interest rates.

At the time, this is what Mr Costello had to say about the decision to take rates to 4.25 per cent — their lowest level since before man walked on the Moon:

“What we’re trying to do is we are trying to ensure that in a global economic downturn, and the United States, the world’s largest economy, is in recession, the world’s second largest economy, Japan, is in recession, in a global economic downturn, that we can keep Australia strong."

“I welcome the fact that the major banks and mortgage originators have indicated they will pass that cut on in full,” he said. “That will represent a saving on a $100,000 loan of about $20 a month.”

Oh yeah, you read right...

Mr Costello talked about a loan of $100,000, which made sense when the median house price in Perth at the time was $171,800.

Today it’s closer to $460,000, which requires a loan upwards of $300,000.

So when the Reserve Bank announces a cut in official interest rates tomorrow (and, in another departure from 2001, it will be announced shortly after the monthly meeting rather than the following day), it will have been a long time between drinks toasting a rate reduction.

Perhaps Reserve Bank governor Glenn Stevens will read over the statement released by his predecessor, Ian Macfarlane, back then explaining the reason for cutting rates at the time.

On that occasion, Mr Macfarlane was concerned about the global economy. He suggested the cut in rates would act as an important buffer for when some steam came out of the housing market, while spare capacity in the economy would remain strong in the coming year.

Six months later, Mr Macfarlane would change tack with interest rates lifted to 4.5 per cent.

It was the first of 12 consecutive rate increases (the last was in March this year) which, coupled with the other increases caused by the global credit crunch, has taken mortgage rates to around 9.6 per cent.

Put it this way. There are millions of Australian homebuyers who have never enjoyed a cut in their mortgage rates.

There are plenty of people at the Reserve Bank who’ve never seen one, or been forced to explain to the public the bank’s reasoning for such a cut — especially as inflation is running at 4.5 per cent.

Mr Stevens and his team have gone out of their way in recent weeks to tell markets, politicians and homebuyers to expect a cut tomorrow.

Financial markets have fully priced in a quarter percentage point cut, believe another next month is a certainty, and haven’t discounted the chance the Reserve Bank might cut even deeper in coming weeks.

But I would suggest this week’s rate cut — if the Reserve Bank follows up its rhetoric — is far more important to the economy than the one back in 2001.

For a start, the low interest rates offered by the Reserve Bank and other central banks back then helped create the property price bubbles that have not yet unwound (particularly in Perth). Those low rates are the reason so many of us are carrying debts that would make our parents feel ill — and put a smile on the dial of our bank manager.

So the rate cuts that are likely to start tomorrow will mean so much more to a homebuyer now than then.

Another important factor is the price of oil. As I mentioned, back in 2001 a barrel of oil sold for less than $US20, while today you’re looking at more than $US115.

Coupled with oil (which is hurting everyone at the bowser) are other commodities. And it is those commodities such as iron ore and coal that have pumped hundreds of billions of dollars into the economy in recent years.

That extra cash sloshing around the nation is another reason why Australian inflation levels are high even by world standards.

While the Reserve Bank knows the economy needs a boost of confidence via a rate cut or two, it fears that the income from the commodities boom (and super-low unemployment) will keep inflation high.

And last time I checked, the Reserve Bank’s main job is to keep inflation under control.

So, Mr Stevens will tell the nation interest rates are being cut, but also warn against going out and spending that cut.

Indeed, the period 2001-2006 when property prices in every capital city just got silly, is Exhibit A in the case for the Reserve Bank being rather careful as it brings interest rates down.

Globally, central bankers were burnt by the asset price bubbles caused by the super-low rates of the early part of this decade (just have a look at the US if you want to know what happens when cheap money mixes with aggressive mortgage marketing).

As I’ve said before, everyone loves an asset bubble if they benefit. But when it ends (and they all end), that’s when the tears and name calling starts.

All of these factors mean tomorrow’s almost certain decision to start cutting rates will be one of the Reserve Bank’s most important, and one of its most difficult.

For 17 years the Australian economy has grown. Unemployment is at 30-year lows. Businesses are at their most profitable.

To maintain this enviable record, much depends on how the Reserve Bank handles the step down in interest rates.

Don’t cut enough, and with the global credit crunch still crunching economies and companies around the world, then a recession will not be avoided.

Cut too much, and the threat of another asset bubble and high inflation rises considerably.

If either come to pass, there will be plenty of people prepared to swap the Reserve Bank with anyone — even Ms Minogue — to handle monetary policy in the future.

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Too late: the odds have changed

This morning at Lasseters Sportsbook you can only get a commitment to pay $15 for every $100 bet on a cut of exactly 0.25%. You only get $500 (down from $800) if you successfully bet on a cut bigger than that.

So my fancy idea for making money no longer works.

Perhaps because one of you tried it.

Perhaps because the economists' joke is right.

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