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Friday, April 20, 2012
AFR editorial warns Gillard off RBA...
Misplaced faith in lower rates
THE AUSTRALIAN FINANCIAL REVIEW
Legitimate debate about the decisions of a central bank can quickly slide into a concerted campaign for soft monetary policy, so the federal government’s top minister should be careful not to be seen to be pressuring the Reserve Bank of Australia into putting its short-term political interests ahead of the longer-run goal of economic stability. The RBA is highly respected internationally for the way it has shepherded the economy through global volatility over the past two decades. Opinion polls show 85 per cent of informed voters approve of the way governor Glenn Stevens has done his job.
No individual government action has obviously stepped over the line. But acts in concert raise a warning flag about the bank’s independence and hence its low inflation credibility. Any doubts about this would build a risk premium into the price that lenders demand for using their money. That is, it would put upward pressure on interest rates.
The government’s actions further run the risk of encouraging the business sector to think that the solution for our present problems lies in the easy option of lower interest rates.
Instead, the solution lies with government and business facing up to the major adjustment in the economy resulting from the gift of high commodity export prices, the resulting strong dollar and from changing technology. A cut in rates is not going to stop that structural change.
The government is right to pursue a budget surplus. But in a speech to business leaders in Perth yesterday, Prime Minister Julia Gillard made a point of linking a budget surplus to a rate cut, declaring that the surplus gave the RBA “plenty of room” to cut its 4.25 per cent cash rate. She said monetary policy should be reweighted away from fighting inflation towards pushing down the Australian dollar, to provide relief to manufacturers.
Economic policy does need to be reweighted away from monetary policy (and the exchange rate) and towards fiscal policy, which is structurally too loose. Highlighting this is a legitimate part of selling the politics of getting the budget back to surplus, where it should have been over the past several years as commodity prices soared to 170-year highs.
Yet, along with bashing the banks over interest rates, Treasurer Wayne Swan has stripped the RBA board’s power to set competitive pay rates for top staff, even amid protests from board member Jillian Broadbent. Its board appointments have been on the “dovish” side, including a lobbyist for manufacturing. And fellow labour-movement travellers such as Australian Workers Union boss Paul Howes have established a drumbeat of demands for lower interest rates and a weaker dollar, even suggesting the RBA’s charter should be torn up. Industry Minister Greg Combet was ill-advised to be standing next to Mr Howes when he publicly launched such a tirade.
As it happens, the RBA is generally expected to cut rates at its meeting early next month if the consumer price index next week shows inflation anchored in its 2 to 3 per cent target. But with the economy almost at full employment and growing near its sustainable trend, a cut in the cash rate may do little more than stimulate real estate prices.
A better approach would be for government and industry to focus more on lifting productivity, as recommended this week by veteran waterfront reformer Chris Corrigan and as demonstrated by Toyota Australia’s bold confrontation of the worst elements of the nation’s industrial relations culture.