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.

In the 2003-04 period, 7.7 million Australian households were spending an average $157 per week on housing. That’s around $1.2 billion per week. As for owners with a mortgage, they paid an average of $287 per
week on housing costs, which represented 19% of their average gross
income per week, according to the ABS.

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.

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.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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