by Alan Thornhill
The Federal government’s push to keep interest rates low has received an unexpected boost.
That happened when the ANZ bank’s Chief Executive, Mike Smith, suggested that the Reserve Bank might have moved too early recently, when it raised Australia’s interest rates by 25 basis points.
The Reserve Bank has the power to raise or lower interest rates.
And its board will meet again, on Melbourne Cup Day next Tuesday, to review its present settings.
The Treasurer, Wayne Swan, put the government’s wishes beyond doubt on Wednesday, when he declared that Australia’s inflation is still “moderating.”
Mr Swan based his assertion on the Statistician’s published finding that the nation’s annual inflation rate has dropped from 1.5 to 1.3 per cent.
However, the bureau also reported on Wednesday that Australia’s prices rose by a higher than expected 1 per cent, over the past three months.
This can be seen as a sign that inflation is accelerating.
The Reserve Bank aims to keep inflation in a 2-3 per cent range, over the course of a business cycle.
It manipulates interest rates, to achieve that.
However, it targets what it calls “underlying inflation,” not the ”headline” figures seen in the Statistician’s Consumer Price Index bulletins.
Mr Swan noted, too, though that Australia’s underlying inflation rate has also eased, from 3.9 to 3.5 per cent.
The ANZ bank chief said he would have preferred the Reserve Bank to wait until after Christmas before it started raising interest rates.
“I feel that we should really be worrying that the flywheel of the economy has got its own momentum and is moving the right way before we start worrying about inflation,” Mr Smith said.
However, many economists believe that the Reserve Bank will raise interest rates, either by another 25 – or perhaps 50 -basis points, anyway, next Tuesday.
The government, though, clearly wants rates to be kept on hold.
And Mr Smith’s remarks add weight to its views.
The ANZ chief also noted, for example, that the government’s stimulus measures are being slowly withdrawn, as interest rates appear to be rising.
“We have to remember that the stimulus packages are also gradually easing off…” Mr Smith said.
However the Reserve Bank’s Governor, Glenn Stevens, has signalled that his bank might well be in an aggressive mood.
He has said that it cannot afford to be “timid” about raising rates.
Mr Smith, of course, will have an interest in the Reserve Bank’s decision, next week.
The ANZ, along with its bigger competitor, the National Australia Ban, has already declared profit cuts this week, that flow from bad debts.
And – presumably – bad debts could keep rising, if interest rates were raised too steeply, before the Australian economy fully recovers.
by Alan Thornhill
The Federal Treasurer, Wayne Swan, insists that Australia’s inflation is still “moderating.”
That statement is important. The next rise in interest rates might well be delayed, if the Reserve Bank agrees.
The Treasurer made his declaration several times yesterday, after the Statistician reported an unusually sharp rise – of 1 per cent - in the nation’s headline inflation rate during the September quarter.
He told Federal parliament that the quarterly rise had been largely driven by “some unusually large increases” in prices charged by State utilities.
Mr Swan said those rises had produced almost half of the quarterly rise.
However the Treasurer said he was “not blaming the States.”
The Consumer Price Index figures, that the Statistician released yesterday, will be watched closely, because the Reserve Bank will take them into account, when it reviews Australia’s interest rates next month.
The bureau reported that the nation’s “headline” rate of inflation fell from 1.5 per cent in the 12 months to the end of June, to just 1.3 per cent, in the year to the end of September.
However it is not the so-called headline rate of inflation that the Reserve Bank board studies, when it reviews rates. It looks, instead, at another figure called the underlying rate of inflation.
The distinction is important, in the rate fixing system.
The bank aims to keep Australia’s inflation in a 2-3 per cent range, over the course of the business cycle.
So – at 1.3 per cent – the headline rate of inflation is now well below the bank’s target rate.
But – at 3.5 per cent – the underlying rate of inflation is above it.
However, Mr Swan told reporters that even Australia’s underlying inflation rate had “eased,” on the latest figures, from its previous level of 3.9 per cent.
The bank could still raise Australia’s interest rates, for the second time in the current cycle, when its board meets on Melbourne Cup day, next month.
The bank’s Governor, Glenn Stevens, has made no secret of the fact that he is particularly worried about the risk of another bout of house price inflation.
That threat arises, largely, from the fact that Australia’s population growth exceeds the present pace of home construction.
A survey, that the Housing Industry Association published earlier this week, also showed that land prices, in major Australian cities, are already rising strongly.
The Bureau’s figures already show that housing prices rose 5.5 per cent over the past year.
But transportation costs fell 5.1 per cent in that time as a result of both lower fuel prices and the stronger $A.
Lower interest rates contributed to a 7.2 per cent fall in the cost of finance and insurance services.
But education costs rose by 5.6 per cent over the year.
by Alan Thornhill
One of the nation’s most celebrated economists is predicting that Australians will soon have to tighten their belts.
“There are hard times ahead,” Professor Ross Garnaut warns bluntly, in his new book, The Great Crash of 2008.
“Sustainable full employment will require reduction of average incomes and living standards…”
By how much?
“…to levels below those to which Australians became accustomed before the crash,” Garnaut replies.
And he says we simply aren’t ready for what is coming.
“The Australian Government, community and business leadership has barely begun to contemplate the adjustment that is required,” he says.
“There is a danger that the lack of awareness of the hard realities will lead to poor management of the difficult days of economic policy,” Professor Garnaut warns.
He expects all this to occur, in the global shakeout that will follow the global economic crisis.
Talk about economics being “the dismal science.”
We shouldn’t despair, though. After all, it was a prominent American economist who said that economic forecasting had been invented only “to make Astrology look good.
by Alan Thornhill
Australia will – finally – get uniform national consumer credit protection laws from July 1 next year.
This follows passage of the necessary legislation through the Senate last night
“These reforms have been a long time coming,” Minister for Financial Services, Chris Bowen said.
Mr Bowen said the reforms would see the creation of a single, standard, set of national laws for the regulation of consumer credit.
“The new laws will also see for the first time consumer protections and regulation put in place for margin loans, as well as the national regulation of trustees and debentures,” Mr Bowen said.
“They will help provide greater certainty to the credit sector while strengthening the range of protections that are in place for vulnerable consumers.
“These important reforms were only possible because they are part of the Rudd Government’s and the Council of Australian Government’s (COAG) drive to a National Seamless Economy,” Mr Bowen said.
He said the fallout from recent economic and financial market chaos had made the need for such legislation clearer than ever.
Mr Bowen said the new laws would provide a system that would allow both consumers and credit providers to look to the one, national set of rules.
” The delivery of these reforms is part of Phase One of the historic agreement made by the COAG in October 2008 for the Commonwealth to assume responsibility for consumer credit regulation,” Mr Bowen said.
There is more information at www.treasury.gov.au/consumercredit.
by Alan Thornhill
With Australia’s present inflation rate still below the Reserve Bank’s target range, it might seem strange that the authorities are even thinking of raising the nation’s interest rates.
Yet that is exactly what is happening. The recent increase of 25 basis points in the bank’s target rate won’t be the last.
Tomorrow’s planned release of the September quarter inflation figures will be a key factor in what will happen to the interest rates you are expected to pay.
The Reserve Bank wants to keep inflation within a 2-3 per cent range, over the course of a business cycle.
Australia’s current inflation rate, on the Statistician’s June Quarter Consumer Price Index is just 1.5 per cent.
However that is just what economists call the nation’s “headline rate” of inflation.
The Reserve Bank looks at what it calls “the underlying rate” of inflation, when it reviews its target interest rate.
It says that is already above its present target range.
The bank’s board will next meet early next month, to review rates.
There is some good news, though.
The inflation, reflected in tomorrow’s Consumer Price Index figures, is likely to be moderate.
Especially as the Australian dollar has been steadily gathering strength, particularly against the $US, over recent weeks.
That tends to make petrol – and other items Australia imports from overseas – at least a little cheaper.
That, in turn, will restrain inflation, without aggressive action from the Reserve Bank.
However, there are other, less favourable influences, too.
Australia’s population, for example, has been growing strongly.
That has outpaced the nation’s rate of home construction.
These factors make another burst of home price inflation a real risk.
That worries the Reserve Bank.
by Alan Thornhill
Text books, especially those in economics, are not supposed to read like Dan Brown thrillers.
They certainly didn’t, anyway, in your correspondent’s student days.
But Ross Garnaut’s new book, The Great Crash of 2008, breaks that rule.
The most chilling thing, though, about the tale it tells is that, unlike Dan Brown’s work, it’ story is all true.
And, unlike other text books, in the arcane subject of economics, it is all quite accessible to the ordinary reader.
(Although Professor Garnaut could well have had a small glossary of essential acronyms, like CDO -collateralised debt obligations-somewhere in the book).
He does, though, mostly keep these mysterious letters close to his, quite clear, explanation of their meaning, in his text.
We all know, by now, that Australia’s banks largely escaped the grim fates that excessive greed brought to their US cousins.
Professor Garnaut’s explanation offers little comfort.
He says they were just four years behind their American counterparts, in the development of the greed fuelled shadow banking instruments, like CDO’s, that brought the American banking system to grief.
In the best traditions of terrifying narratives through the ages, Ross Garnaut tells a strong moral tale, in his new book.
This is a story that can highly recommended to all Australians who want to keep their personal finances in order.
West Australians, in particular, should read it. Their newspaper, the dear old West Australian, for which your correspondent wrote, for many years, is already enthusiastically reporting the new boom, before the old crisis has passed.
Reality checks, though, are necessary everywhere in times like these.
And Ross Garnaut is offering some excellent ones, right now.
His book was published by Melbourne University Press. It is selling for $24.99.
by Alan Thornhill
The global financial crisis isn’t over yet, but early lessons are starting to emerge.
And the Prime Minister, Kevin Rudd, had a few to offer, when he launched Ross Garnaut’s book, the Great Crash of 2008.
Notably, Rudd said the crisis has shown that Ronald Reagan was wrong, when he famously declared that “government is the problem.”
The Prime Minister recalled that the economist, John Maynard Keynes, had concluded, after the Great Depression of the 1930s, that market economies cannot function without governments playing “a balancing role.”
That is, they had to step in when the private sector is “in retreat.”
Keynsian economics fell out of fashion, in the 1960s and 1970s – and direct government intervention in economies became harder to justify.
In some circles, for example, governments were regarded merely as “the lesser of two evils.”
Rudd argued, though, that the flaws in that argument were exposed, when Lehman Brothers went broke, late last year, setting off a huge crash on world stock markets.
He noted that the latest crash had, in fact, been bigger than the one that set off the Great Depression.
Twice as big, in fact.
The great crash, of those times, saw world stock markets plunge by 20 per cent.
This time, share prices fell 40 per cent.
The Prime Minister’s speech is worth reading, in its entirety. It’s on the web at www.pm.gov.au.
Ross Garnaut, though, harbors some reservations about the Rudd government’s response to the crisis.
He is, frankly, worried by the level of structural debt, that is being built up – and believes that could put a brake on Australia’s recovery.
by Alan Thornhill
Do you sweat a lot while gambling?
If so, that might be a sign that you are a problem gambler.
It is one of the “visible indicators” of problem gambling, listed in a new report that the Productivity Commission has just published.
Others include weeping, after losing a lot of money and shaking while you are gambling.
The report says Australia’s problem gamblers lose almost $5 billion a year on poker machines alone.
It estimates, though, that Australians are now losing more than $18 billion a year, through gambling.
That’s almost as much as the $20 million we spend each year on clothes and shoes
The Commission also estimates that Australian lose $12 billion a year on the “pokies” alone.
It says Australia has 125,000 problem gamblers.
The Commission recommends restricting bets on poker machines to $1 a time and moving automatic tellers away from the “pokies.”
At present, people playing the pokies can lose up to $1,200 an hour.
The Commission says losses should be automatically capped at $120 an hour.
Predictably, perhaps, the Commission lists Australians living in the Northern Territory as the nation’s biggest gamblers.
The average loss, for adult Territorians who gamble, is more than $3,500 a year.
Tasmanian gamblers, though, are Australia’s most careful. They lose just $940 a year.
Alan Thornhill is a parliamentary press gallery journalist.
Private Briefing is updated daily with Australian personal finance news, analysis, and commentary.
Wednesday December 11
The Dow Jones index fell 53 points to 15,973
Acting PM Warren Truss writes to Mike Devereux seeking “a clear statement” on Holden’s future
The Federal Treasurer, Joe Hockey, says the Mid-Year Economic and Fiscal Outlook will be released next Tuesday, at the National Press Club.
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