The Reserve Bank says inflation will be worse than almost everyone expected.
Equity prices plummet. The Aussie dollar rises. Respected economists run round like headless chooks squawking "more rate hikes to come!"
Financial markets dramatically mark up the chances that the next rate hike will be in March. Businesses plan their price hikes. Unions think harder about how to protect the bruvvers and sisters.
Ordinary people - whose inflation expectations were already elevated - grimly recalibrate their household budgets.
The government says all this was the Liberal Party's fault. John Howard hits the international speaking circuit. Peter Costello leaves for a supposedly lucrative overseas job. Malcolm Turnbull flips between saying "look what Labor has already delivered" and "there is no problem, inflation is still in the target band".
What about the blame that should be sheeted home to the Reserve itself? It is the agency with formal responsibility for controlling inflation, a responsibility that, after initial scepticism by its then leader, it embraced warmly.It is the organisation that after a long intellectual struggle was given by financial deregulation, including the flexible exchange rate, the technical ability to control inflation. It is the mob that was given salaries sufficient to attract and retain what it saw as the "best and brightest" of Australia's economists.
To read more from Henry Thornton, simply click on the link.
Showing posts with label reserve bank of australia. Show all posts
Showing posts with label reserve bank of australia. Show all posts
Thursday, February 14, 2008
Thursday, January 17, 2008
The Global Correction: What's Going On?
Global markets have taken a battering over the last week, and Australia certainly has not been immune. We are increasingly appreciating that the air of immunity that has hung over us for over a decade has been somewhat intoxicating.
Australian shares are now down more than 14 % from their recent peak in November. Another way to put this is that average share prices have given up most of 2007's stellar gains and have fallen to last quarter of 2006 prices. The shareprice of Qantas has notably been one of the casualties, with the few that have benefitted being food producers, such as AWB.
Already the tough-nut, hardened experts are shrugging off the "correction", noting that when shares fall 20 % in a day, that's a crash.
Nevertheless, Australian shares have fallen slightly more than US shares, despite the fact that the Australian economy seems to be in far better shape. Unemployment in the US is rising, and new home approvals is at the lowest level in 27 years.
Both Australia and the US are indeed suffering inflation, led by rising food and energy costs. Growth indicators are far stronger in Australia, but unsustainably so (for example, retail sales and job vacancies growth of the order of 7 % annually). Australian banks and other financial institutions seem in far better shape than similar institutions in the USA and indeed are somewhat less dependant on the US market than some would have us believe.
There are, however, warning signs. Those most clear are the sheer expanse of Australia's credit boom; our heavy reliance on our resources propping up other sectors; and as many of you are experiencing, rising interest rates and inflation are certainly burdens that we are having to take on the chin.
As Henry Thornton adeptly explains, "Equity markets are said to be driven by waves of fear and greed. While fear produces crash and greed causes bubble, markets in more normal times are also the best economic prediction machines we have."
Just possibly, Australia's greater correction so far may be signalling that the Australian economy has more slowing to do from this point than the US economy. Compared to the USA, growth has to slow in most places, even in China and India.
This does not mean either the US or Australian economy, or the Chinese economy need suffer a recession. Growth has to slow in all three countries, and in many others, because recent growth is unsustainable.
The message of the markets is that this slowing is underway. If we are lucky, adjustment will be mild and will be achieved with minimal damage in terms of lost jobs, bankrupt businesses and social and political unrest.
Despite the financial market trembles, the Reserve Bank should help Australia achieve a soft landing with at least one more rate hike next month. The Rudd government needs to tighten spending substantially - having "found" a surprise saving of $3billion from "underspending" in health care, education and infrastructure from the Howard Government, Rudd has been helped in it's quest for finding savings of $10billion.
The much discussed drop in consumer confidence should be welcomed as a sign that Australian households are rational, and some spending restraint is highly rational now - better late than never.
Simon Turner simon@marquetteturner.com.au
Australian shares are now down more than 14 % from their recent peak in November. Another way to put this is that average share prices have given up most of 2007's stellar gains and have fallen to last quarter of 2006 prices. The shareprice of Qantas has notably been one of the casualties, with the few that have benefitted being food producers, such as AWB.
Already the tough-nut, hardened experts are shrugging off the "correction", noting that when shares fall 20 % in a day, that's a crash.
Nevertheless, Australian shares have fallen slightly more than US shares, despite the fact that the Australian economy seems to be in far better shape. Unemployment in the US is rising, and new home approvals is at the lowest level in 27 years.
Both Australia and the US are indeed suffering inflation, led by rising food and energy costs. Growth indicators are far stronger in Australia, but unsustainably so (for example, retail sales and job vacancies growth of the order of 7 % annually). Australian banks and other financial institutions seem in far better shape than similar institutions in the USA and indeed are somewhat less dependant on the US market than some would have us believe.
There are, however, warning signs. Those most clear are the sheer expanse of Australia's credit boom; our heavy reliance on our resources propping up other sectors; and as many of you are experiencing, rising interest rates and inflation are certainly burdens that we are having to take on the chin.
As Henry Thornton adeptly explains, "Equity markets are said to be driven by waves of fear and greed. While fear produces crash and greed causes bubble, markets in more normal times are also the best economic prediction machines we have."
Just possibly, Australia's greater correction so far may be signalling that the Australian economy has more slowing to do from this point than the US economy. Compared to the USA, growth has to slow in most places, even in China and India.
This does not mean either the US or Australian economy, or the Chinese economy need suffer a recession. Growth has to slow in all three countries, and in many others, because recent growth is unsustainable.
The message of the markets is that this slowing is underway. If we are lucky, adjustment will be mild and will be achieved with minimal damage in terms of lost jobs, bankrupt businesses and social and political unrest.
Despite the financial market trembles, the Reserve Bank should help Australia achieve a soft landing with at least one more rate hike next month. The Rudd government needs to tighten spending substantially - having "found" a surprise saving of $3billion from "underspending" in health care, education and infrastructure from the Howard Government, Rudd has been helped in it's quest for finding savings of $10billion.
The much discussed drop in consumer confidence should be welcomed as a sign that Australian households are rational, and some spending restraint is highly rational now - better late than never.
Simon Turner simon@marquetteturner.com.au
Thursday, November 8, 2007
Interest Rates Rise With More Likely
In line with most forecasts the Reserve Bank of Australia yesterday lifted interest rates by 0.25%. The decision lifts the RBA’s cash rate to 6.75% and will mean an extra $68 per month on an average $400,000 mortgage.
Governor Glenn Stevens was clear in his statement that the strength of Australia’s economy is operating close to the limits of its capacity. Hawkishly, however, he pointed out that there are few signs of that strength diminishing as yet, and reports of high capacity usage and shortages of suitable labour persist, thus suggesting too much growth rather than not enough.
Commonwealth Bank senior economist John Peters says the statement suggests the RBA sees all the risks to the economy being on the side of too much growth, rather than not enough.
“It’s a hawkish statement that signals they’ve got a pretty firm tightening bias in place,” Peters says. “It points to stimulus coming from all corners; high capacity utilisation, consumers are spending, lowest unemployment in three decades, governments are spending as well, and new dwelling investment has started to become a positive factor and will make a bigger contribution as time goes on.”
The key question now is not if there will be another rate rise, but when. Such strong economic conditions could mean that more rises are on the way, perhaps as soon as December. Given that the RBA has increased interest rates twice in the last three months, it would be unwise to suggest that yesterday’s rise will be 2007’s last. Simon Turner
Governor Glenn Stevens was clear in his statement that the strength of Australia’s economy is operating close to the limits of its capacity. Hawkishly, however, he pointed out that there are few signs of that strength diminishing as yet, and reports of high capacity usage and shortages of suitable labour persist, thus suggesting too much growth rather than not enough.
Commonwealth Bank senior economist John Peters says the statement suggests the RBA sees all the risks to the economy being on the side of too much growth, rather than not enough.
“It’s a hawkish statement that signals they’ve got a pretty firm tightening bias in place,” Peters says. “It points to stimulus coming from all corners; high capacity utilisation, consumers are spending, lowest unemployment in three decades, governments are spending as well, and new dwelling investment has started to become a positive factor and will make a bigger contribution as time goes on.”
The key question now is not if there will be another rate rise, but when. Such strong economic conditions could mean that more rises are on the way, perhaps as soon as December. Given that the RBA has increased interest rates twice in the last three months, it would be unwise to suggest that yesterday’s rise will be 2007’s last. Simon Turner
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