Steady as she goes


Last Wednesday just before 9.30am Westpac’s trading room floor was very quiet. The odd phone rang, and there were one or two lazy, half-hearted conversations about the footy. Most people were closely watching their computer screens waiting for the Reserve Bank’s advisory on the nation’s cash rates.

Bang on 9.30 the screens lit up and there was a dull roar as the currency market started moving and all the traders quietly congratulated themselves that they’d positioned correctly for the announcement. Rates would remain the same “ steady at 5.5 per cent. Westpac was one of only five economists who predicted there would be no change to our interest rates. The other eighteen got it wrong “ big time.

Picking the outcome of the monthly RBA board meeting, which amongst other things considers Australia’s cash rates, has become a national sport. In the week prior to the first Wednesday of every month, people around the country uselessly fret about the announcement and journalists endlessly ask just about every person in the financial sector who’ll talk to them: What’s the Reserve going to do? Will interest rates go up, down or remain steady?

Thanks to Bill Leak

Thanks to Bill Leak

The Reserve Bank’s economists are stats junkies and they need to be, given their now dual role of providing a level of stability within the economy. As one of our readers so delicately pointed out to me late last year Australia does indeed have the highest interest rates in the OECD but as our dear Treasurer likes to point out we also have one of the fastest growing economies in the OECD as well. Does it make a difference? Yes, it does; mainly because most of our growth and prosperity is grounded in record debt levels, one of the factors that helps nudge up inflation. One of the easiest ways to combat rising inflation? As most of us already know “ it’s to jack up interest rates.

Inflation is our enemy and it’s on the rise. Some of the causes are out of our control, such as the US Federal Reserve’s direction on monetary policy and sky rocketing oil prices, but one or two of the other causes, such as the squeeze in the labour market because of a massive skills shortage and problems with key infrastructure, lies squarely in the policy domain.

Unemployment is at an all time low – an average of 5.1 per cent across the board. The Government likes that part a lot. There’s continued employment growth, around fifty to sixty thousand jobs a month – again, aren’t they clever. However, the economic growth has slowed to a twelve year low, consumer sentiment nose-dived after the March interest rate rise, business confidence was down, our exports are a bit crook and, to top it all off, our household debt is still very impressive. Not so good.

Whilst the Prime Minister, Peter Costello, John Anderson and just about every other member of the Government who could get near a microphone voiced their displeasure at the March rise, the numbers did manage to keenly focus their attention in the key areas of skills and infrastructure. The Government’s got problems and they’re aware they need to some find solutions, even quick fix ones, pronto if they’re going to keep the economy bubbling along. Any attempt by the Treasurer to suggest that a national industrial relations system will help control wage growth and thus inflation, as he has been doing in the past few months, is a distraction at best.

More importantly as far as Peter Costello’s concerned, any pitch he made for the top job would be damaged irrevocably if he were unable to continue growing the economy and keep interest rates relatively low.

To that end, instead of brain-storming coherent policy directions, the Government has launched upon the strategy of bank bashing. Others have done it in the past so it’s not new. It’s a game of subtle and thinly-veiled criticisms directed at the manner in which the Reserve considers monetary policy; nothing overly offensive but it’s bank bashing nonetheless. The electorate is firmly left with the impression that it’s the faceless big-end of town bankers who are responsible for their woes. The Bank does little to defend itself.

The Reserve only gives out information when they increase the cash rate. Unfortunately, the silence that comes with a ‘no change’ announcement is particularly frustrating, making speculation boundless. Yet, despite Ian MacFarlane’s reluctance to explain his board’s decisions, some of the other boys and girls over at our central bank have been very chatty of late. In fact, they’ve said more in the past couple of weeks than they’ve probably said in the past ten years.

Deputy Governor, Glenn Stevens has been the most verbose. Giving a speech in Sydney last Friday he kindly confirmed that the bank had written to the Liberal Party about its dodgy advertising material. This followed complaints from the markets about the unwise statements made by Directors, Jillian Broadbent and Warwick McKibbin, along the lines that the Reserve was still worried about inflation rises. As Stevens suggested, this is unlikely to happen again so we can all look forward to the information vacuum becoming the norm once more. I doubt this discreet retreat will provide the Bank with the protection it will need in the future.

The economy is the political battleground for the next three years and interest rates are the easiest, most identifiable indicator for the electorate. Interest rates start going up, household budgets, especially highly geared ones, become very tight and all of a sudden voters look for someone to blame. Labor knows it and is pushing the Government hard. On that basis it’s almost inevitable that the Reserve will increasingly become a tool used by both sides for attacking one another.

The Government has set an unpleasant precedent with its misleading and shabby use of the Reserve Bank during the election. Labor definitely has a legitimate beef and they’re right to demand an explanation. But listening to Kim Beazely’s over the top rhetoric and Bob Brown’s call for yet another Senate inquiry over the weekend I thought that the caravan had moved on. I doubt that the Coalition’s quite devious and negligent quoting of the Reserve would have altered the electorate’s opinion of Labor’s ability to handle the economy. However, the AEC would want to have a long hard look at themselves if they’re happy to accept the Liberals pathetic excuses that it was a mistake caused by a misprint.

The Reserve Bank is independent. The myriad of data they use to determine monetary policy and provide financial system stability is vast and within that, Government policy is just one part of this complicated jigsaw. I’m sure the pundits are correct when they say that thus far the Bank has taken no notice of public political comment when undertaking their deliberations. However, the economists and experts at the Reserve and on the board, despite their professionalism, are still human and sustained attacks on their credibility, the manner in which they interpret information, and increasingly insistent calls for greater transparency must surely and gradually have some affect on their thinking.

The numbers and hard statistical data will always have precedence but given the Reserve has just commissioned its own survey to chart household behaviour in regard to housing equity and Stevens’ remarks last week about the Reserve’s changing statistical needs tell us, even with all the information that’s available to them, the Bank believes they still need more.

This month’s announcement bucked a previous trend. In the past interest rate hikes have gone up in twos, meaning that rates go up two cycles in a row and then generally plateau for a while. May’s announcement will be just a week before the Federal Budget. Peter Costello does not want a rate rise, and given recent political manoeuvrings, I can’t help but wonder if the Treasurer might feel it necessary to brief the Reserve ahead of the Budget. Given the Government’s recent form I’m not sure it’s out of the question.

And given the way the Coalition scared the living daylights out of voters (including this one) about rising interest rates and a surety of rises under a Labor Government it would be very sweet justice if it turned out that their campaign strategy based on exploiting people’s fears had helped perpetuate interest rate rises.

The events of the past week have confused the market and speculation is already running rampant but some of the key data the Reserve is waiting for includes the building approvals from March and housing finance for February. The next round of consumer sentiment will be available “ likely to bounce up a little – and of course oil prices have dropped slightly this week. Westpac’s predicting interest rates will stay steady again and other economists are following their lead.

It’s a numbers game at the end of the day. Traders and economists are a special breed; they hang on every word. Some fall back on years of charting figures, some listen to news and read the papers and others use their connections for an inside running. All crunch reams of data. They’re an arrogant bunch; they have to take a position and then back themselves. Some have a very tidy sideline expounding their views to a public hungry for guidance about their fortunes and we the media feed the mill giving it all a run. The only difference is it now seems to be a continuous commentary rather than just once a month.

The TAB should open a book for these monthly announcements – they’d make a killing.

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