(no subject)

Aug 02, 2006 09:42

Today’s media release from the Reserve Bank has a number of interesting juicy bits which otherwise dry monetary policy statements haven’t exhibited for a quite a few years. Most notable is this sentence, about as explicit as central-banker speak gets:

"Although the increase in the headline CPI was much larger, reflecting fuel price increases and a sharp rise in the price of bananas in the wake of Cyclone Larry, the Board recognises that it is necessary to abstract from temporary influences in forming its policy assessments."

Indeed, it’s quite worrying to think that the average Australian is careless enough to think that banana prices have been a major factor in today’s rates decision (although I suspect most Australians are quite unaware of how monetary policy works and go by what’s on the telly anyway). It’s a sign of how interest-rate obsessed we’ve become when the RBA needs to mention the prices of one fruit product in a monetary policy notice. I found the use of the word “wake” quite telling -- it’s a nice little sound-bite, so the journos won’t even have to re-word it to make it sell.

On more important considerations, it’s interesting to speculate on the potential role politics and market sentiment played in this rate rise. Given the underlying inflation outlook, low spare production capacity and strong credit growth, it was pretty much inevitable on economic grounds, so the Reserve’s comments are credible in this sense. However, it’s hard not to think this decision was swayed (or brought forward) by the fact financial markets had priced in a 25 basis-point rise as a near certainty. Not raising would greatly tarnish the Bank’s reputation. Also, as Governor Ian Macfarlane’s last decision before retirement, not raising rates would have given him a poor legacy, especially if inflation picked up more than expected. But this is a moot point - he was an excellent governor, and this decision was well-founded in the economic ‘fundamentals.’

To me, the most interesting (in the economics sense) part of the Reserve’s decision concerned credit growth, namely, that “although the cash rate has recently been slightly above its average for the low-inflation period since 1993, interest rates paid by borrowers have remained below average.” In other words, the cash rate is not high anymore, and at the most it is now close to a neutral level. (Why is Australia’s ‘neutral’ interest rate so high? See Tim Colebatch in yesterday’s The Age). As a corollary, this might also suggest the Reserve thinks rates may need to rise again in the near future.

On another note, today’s Australian has an editorial on the incoming governor, Glenn Stevens. Somewhat bizarrely, they criticise Ian Macfarlane for raising rates too high when the GST was introduced. However, had the impact of this tax been as was expected at the time, there was a pretty good chance not raising would have resulted in persistent inflation down the track. Even casting this aside, it is difficult to criticise Mr. Macfarlane. His handling of our housing boom has been especially noteworthy, especially given the un-stated constraints placed on him by politics. In this regard, perhaps, he might even be seen as a superior central banker to even Alan Greenspan (although many economists would probably disapprove of my saying so). If Mr. Stevens is even half as good as Mr. Macfarlane, we can look forward to a continuation of strong economic growth and sensible, pragmatic monetary policy.

Incidentally, the Oz’s editorial also complains that Board minutes aren’t released to the public. Given the high proportion of Board members that are businessmen (and especially the likes of Roger Corbett), surely the release of minutes would constrain the Reserve’s ability to act pre-emptively against inflation. Sometimes anonymity and honesty are more important than transparency.

When will rates change next? That’s impossible to say, and if anyone gives you a serious answer, they’re not a good economist. But that said, if I was a betting man, I’d bet on a 0.25% rise in October. Today’s rise is unlikely to quell all the inflationary pressures present in the economy, and Mr. Stevens needs a month or so to settle in…

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