The minutes of the April board meeting suggest that the Reserve Bank is relaxed and happy with the state of the world and its contribution to that state. With an allegedly tough budget to come, there is no strong reason to change this feeling, unless of course senior staff of the Bank are beginning to feel they have misread the state of the Australian economy.
The April minutes point out that the Asian nations are growing quickly with inflation a growing concern. Japan had just been hit by the triple disaster of major earthquake, tragic tsunami and nuclear leaks from damaged reactors. As with other natural disasters, like the more recent tornados in America, the immediate effect is death and destruction and reduced real growth – degrowth would be a better label – with reconstruction later boosting growth. Euroland was seen as showing signs of overall recovery with the first interest rate hike duly expected. The ECB delivered on that expectation on xxx, despite ongoing fears of sovereign debt crises in the weaker Euroland nations. Not mentioned in the minutes is the state of major Euroland banks, which this writer remains deeply concerned about.
Another important topic not explicitly discussed is the contribution of extremely soft US monetary policy to the alarming build-up of global inflation. Evidence of this goes well beyond the indicators of goods and services inflation in major Asian nations. It includes rapidly rising commodity prices, including the prices of gold, oil , coal, iron ore, many other metals and foodstuffs. The analytic point that seems to be missing from the board minutes (and perhaps also from the staff’s understanding) is that the US dollar is the de facto global monetary standard. That standard has been debased by first Greenspan and then Bernanke’s panicked and asymmetric reaction to asset price fluctuations. US monetary policy has not been tightened when US share prices boom, but has been suddenly eased when US share prices tumble. Ben Bernanke, said recently in Washington that he had no timetable to tighten America's super-easy monetary policy. Do you agree with this, Mr Stevens? Surely the Australian public deserves a clear statement of the Bank’s views on this vital matter.
As a major exporter of commodities, commodity price inflation is boosting Australian incomes and making us wealthier. For the present, households are saving more, which is an entirely welcome development, even if retailers and property developers whinge about it. There can be no doubt that rising interest rates and a strongly rising currency will do great damage to Australia’s manufacturing sector, but this is the inevitable consequence of the massive resource boom now underway after the brief respite during the global financial crisis.
I do not wish to minimise the problems faced by the Reserve Bank. Imported inflation was beyond the limited understanding of the Whitlam government, and still seems to be baffling a Labor government 40 years later. And then, in the late 1980s, the Reserve held back on interest rate hikes against the advice of the staff of the bank on the grounds that the rising dollar would satisfactorily deal with inflation. Clarity about the causes of our current situation is necessary if there is to be a sensible outcome. With an explicit mandate to fight inflation as an independent, supposedly expert, arm of government, there can be no excuse if the Bank fails in its job.
The higher than expected CPI outcome for the March quarter is further evidence of the proposition argued in this column for several years now. Australian inflation hit 5 % just as the global crisis reached it crescendo in 2008, saving the Reserve Bank from horrible embarrassment. Now we are headed again into a time of excessive inflation. As I said in this column in March: “Australia’s goods and services inflation is rising, though when it will break through the RBA’s ‘target zone’ is a matter for legitimate debate. Sooner than you think, Mr. Stevens, is my view, but I do not expect you to take that view seriously”. Well, sooner than you think has come sooner than you expected, and there are several further reasons to banish any remaining complacency.
First, and most important, compared with the previous 5 % inflation near-crisis, Australia now has a Labor government and soft Labor IR policy. As the minutes of the April meeting say, ‘wage growth was increasing in mining-related industries and some skilled occupations’, but not yet do we see ‘widespread’ pressures in the labor market. Unemployment has now fallen below 5 %, and the Treasurer this weekend shared his view that there will be massive further job creation and a rate of unemployment of 4.5 % predicted in his forthcoming budget. Business and households deserve a clear statement, in the minutes of today’s meeting, of whether the RBA expects this outcome, if achieved, to boost wage claims to dangerous levels.
Then there is the overall shape of the budget itself. We have been told repeatedly that it will be ‘tough’, but also that it may predict a deficit of $50 billion. It defies reason that such a budget can be described as tough. Mildly discomforting, perhaps, but nowhere near tough enough to check the inflationary forces that are already manifest in the Australian economy. Again, this is a matter on which we taxpayers deserve a clear statement from the Reserve Babk.
There is the closely related question of whether Australia’s overall rate of saving is appropriate for the heady boomtime we are already experiencing. Firms have been deleveraging but this phase seems to be over. Households have been saving modestly but, as memories of the global crisis wane, a return to more normal spending patterns can be expected. Governments are still spending in excess of their revenue, with the promised Federal surplus receding into the haze that obscures all future events. In any case, even a tiny surplus in 2012-13 will mask a substantial structural deficit. Even the International Monetary Fund can see that Australia needs a sovereign wealth fund to divert a substantial part of our mining wealth to overseas investment to prevent a rising Australian dollar (and rising interest rates) from strangling non-resource-based businesses.
The April minutes concluded by saying given the outlook for the economy, and in particular the high level of the terms of trade and the prospective further large increase in investment, members considered that the Board’s then stance remained appropriate so as to ensure that the medium-term inflation outlook remained consistent with the target. Members therefore did not see a case to change the cash rate.
Given further evidence of imported inflation, the need to rebuild following the natural disasters, the coming flood of resource investments and the clearly unacceptable domestic cost pressures the case for a rate hike is even greater than it was in early April. We’d feel a whole lot more comfortable if the minutes displayed a clear understanding of the threats to Australia’s prosperity rather than the comfortable platitudes in the minutes of the April meeting. Do you agree Mr Stevens?
Courtesy The Australian
Published today in The Australian.
Michael Stutchbury's commentary today (ie 10/5) reveals more about the Reserve Bank's thinking. One hopes this has a familiar ring to Henry's readers. 'THE spectre hanging over Wayne Swan's budget tonight will be bubbling domestic and global inflation that threatens to interrupt the country's China luck and torpedo his promised surplus.
'The Reserve Bank's growing inflation alarm explains its sudden flagging of post-budget interest rate hikes. It now identifies the global commodity price bubble being blown by super-loose US monetary policy as Australia's chief economic risk. This could feed into higher global inflation, leading to a belated policy over-correction and a "sharp slowing in growth".
"This would be a scenario where growth in demand in the Australian economy would be stronger in the near term but weaker in the medium term if commodity prices subsequently fell significantly," warns the bank's quarterly monetary policy statement published on Friday'.
'That is, the same commodity price boom that underpins Swan's return-to-surplus hopes is vulnerable to a sharp correction that could hit Australia harder than the global financial crisis. The China boom that helped Australia weather the financial crisis so well also makes us more vulnerable to a global inflation outbreak'.