Thursday 21st February 2008 - 6:50 am

Rates:assessing the threat

by Alan Thornhill

The Reserve Bank chief, Glenn Stevens, is acting like Sylvester Stallone on steroids.

And Chris Richardson, of Access Economics, is predicting four fresh interest rate rises.

As Mr Richardson is a former Treasury wonk, we can rest assured that his old mates, back in the Department, are now giving very much the same advice to the Federal Treasurer, Wayne Swan.

So what are we, in the real world, to draw from all this?

The first thing to be said is the obvious. Interest only investments are looking pretty good, right now.

Especially as the returns on 90 day bank bills, right now, are at their highest point since the Y2K panic.

But what would cooler heads see in all this?

Due allowances must always be made, for the way things actually work in the real world.

The Treasury and the Reserve Bank are both appalled by Kevin Rudd’s plan to introduce $31 billion worth of staged tax cuts, over the next three years./ Especially as those tax cuts will start from July 1.

The legislation, to put that into effect, is already before parliament.

Meanwhile, like all analysts, Chris Richardson has done his sums. The results shocked him.

He gives Kevin Rudd’s razor gang very little chance of finding big enough cuts to make, in Federal spending, to offset Australia’s already high inflationary pressures. Let alone those still to come, from Kevin Rudd’s tax cuts.

So Chris Richardson is almost alarmist, on the outlook for interest rates.

That is, of course, except for those lucky people who happen to have a few hundred thousand dollars, lying idle, and looking for a place to rest, profitably, for the next few years.

Their prospects are bright.

But is Chris Richardson right?

Private Briefing doesn’t doubt that Chris got his sums right.

But, as always in economics, it is not so much the data, but the part of the data that you choose to look at, that matters.

And the part of the picture, that both Access Economics and the Reserve Bank do seem to be overlooking is the sharp downturn now evident in the US economy.

It’s impact, on Australia, comes down to a matter of timing.

Both Stevens and Richardson are betting that America’s slump will take some time to hit the Australian economy.

Yet it’s first effects are already here.

Australia’s banks are already charging their home loan customers more, because they have to pay more for the money they lend.

Although Australia doesn’t export all that much to America directly, our biggest customers, China and Japan, do.

And China has problems of its own. Severe winter storms have not only disrupted food supplies there, but pushed that country’s inflation rate above 7 per cent.

So we can expect to see some sharp remedial action there, too.

In other words, if America slips into a recession, or even something very like a recession, that is likely to hit Australia’s economic growth, too.

And, if that happens, those nasty inflationary pressures, that now torment the good and the great, could suddenly become yesterday’s villians.

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Wednesday 20th February 2008 - 10:47 am

Rate hikes “working”

by Alan Thornhill

The Reserve Bank’s campaign to slow the Australian economy appear to be working.

This shows up in the Westpac leading index, which now suggests that economic growth will slow in the months ahead.

The RBA’s objective has been to put a brake on the economy and -by doing that – ease inflationary pressures.

Westpac said its leading index stood at 4.7 per cent in December, just above its long term trend rate of 4.2 per cent.

Its chief economist Bill Evans said it is now reasonable to expect the nation’s economic growth to slow from its present 4 per cent to 3.5 per cent in the second half of this year.

“In 2009 we expect that growth will have slowed towards 3 per cent,” he added.

Reserve Bank economists will be mightily pleased at this news.

They believe inflationary pressures in the economy have now reached a dangerous level.

The recent rate rises – with the threat of more to come – have been designed to slow the economy and reduce those inflationary pressures.

The Prime Minister, Kevin Rudd, has accepted the Reserve Bank’s advice that inflation is now the biggest threat that the Australian economy faces.

Two surveys, published recently, also show signs that Australia’s long boom may be subsiding.

They showed that both business and consumer confidence has eased over recent months.

Wednesday 20th February 2008 - 7:30 am

Rates:the case for patience

by Alan Thornhill

The Reserve bank, itself, states a strong case for patience, on rate rises, in the minutes of its February 5 meeting, which were released yesterday.

But it is not accepting that argument. Instead, it is warning, in the clearest possible terms, that it stands ready to raise rates again, possibly as early as March 4.

But the nay case is strong, too. So let’s look at it.

The minutes showed that the board saw “continuing turbulence” and “negative sentiment” on world financial markets.

They noted, too, that there had been “substantial write downs” and “growing pessimism” about growth prospects, in the world’s biggest economy, that of the United States.

Board members were also told that the IMF had cut its forecast of world growth this year to 4.1 per cent from about 5 per cent, over the two previous years.

Moreover, the minutes added:”the IMF regarded risks to its latest forecasts as predominantly on the downside.

“Members noted that the forecasts envisaged outcomes in the US and global economies that were weaker than forecast by the IMF.”

The minutes acknowledged, too, that interest rates are already rising in Australia, without RBA intervention.

That is happening as Australia’s banks set out to recoup the extra expenses they are incurring, as they, too, have to borrow, at higher rates, on world markets.

So were “inflationary pressures” from other sources so high, that the RBA could not, in good conscience, wait for this natural slowing, which will occur anyway?  Did it have to raise rates, as well?
Monetary policy is a blunt instrument.

Those hurt, when it is used to fight inflation, are asked to take a big, and probably unfair share of the burden of adjustment.

The main victims are  the mostly young families, who are paying off their homes.

They account for no more than one third of  the Australian public. Other people are either renting, or have already paid off their homes.

The RBA certainly faced a grim choice.

If inflation escapes, as it well might, it can be very difficult to bring it back under control again.

But it is probably unfair, also, to blame the RBA for the decisions it is taking.

The politicians gave the bank the power to adjust rates, for their own convenience.

They didn’t want to be blamed for raising, or not raising rates, close to an election.

But if there is one thing that the present situation shows, very clearly, it is that attacks on inflation need to be broader than they can be under the present system.

Perhaps it is time for that system to be overhauled.

There is more than the convenience of a few politicians at stake here.

Wednesday 20th February 2008 - 6:59 am

Spending cuts “bite” cargo security

by Alan Thornhill

Kevin Rudd’s spending cuts are starting to bite.

The opposition is arguing, for example, that the $7.8 million Lindsday Tanner’s razor gang is planning to slice from an aid program to Indonesia will have serious repercussions.

The previous government had set that money aside to help train the Indonesian officials who enforce the security of cargoes at sea.

Although this is part of a wider plan, involving the Philippines and other regional neighbours as well, only training in Indonesia will be affected by the cut.

The National Party leader in the Senate, Nigel Scullion,closely questioned the government on the issue, at a meeting of the Senate Standing Commit tee on Rural and Regional Affairs and Transport, yesterday.

“I have to say that we are concerned,” Senator Scullion said.

“This is a reckless move.”

Senator Scullion said he would not argue that maritime safety standards in the region would be damaged. But they would be affected.

Stephen Conroy, the government minister at the hearing, said Senator Scullion’s conclusions were not supported by evidence that Australian officials, working in this area, had given to the hearing.

Private Briefing can tell you, also, that the Howard government’s “sky marshalls,” who were to keep us all safe in the air, by riding incognito, but armed, on commercial flights, are also likely to become victims of Kevin Rudd’s economy campaign.

Remember, you heard it here, first.

Wednesday 20th February 2008 - 6:35 am

AWAs:Out with the old

by Alan Thornhill

Workers who want to register individual deals with their employers will be forced to use common law in future.

That became clear yesterday when the Coalition parties scrapped their attempts to keep Australian Workplace Agreements alive.

The decision, taken at party meetings, was an embarrassment for  the Liberal leader, Brendan Nelson and front-bencher Julie Bishop.

Both had strongly supported retention of AWAs, which were a central part of the John Howard’s industrial relations reforms.

And both had wanted the opposition parties to keep fighting for them in the Senate, where they will still have a majority until June 30.

However party members, led by Joe Hockey,  over-ruled them. They accepted that the Howard government’s unpopular Work Choices legislation was a major factor in the coalition’s defeat on November 24.

Common law agreements, though, do have disadvantages. The main one, probably, is that they can be difficult to enforce.

Australia’s courts are not well placed to deal with disputes over pay and conditions.

Workers who are already on AWAs will be given two years to make transitional arrangements, under proposed legislation that the new Labor government now has before parliament.

The opposition might still try to extend that transitional period to five years.

The government’s own plan for an overhaul of Australia’s industrial relations system favours collective bargaining.

But the opposition is still planning to use its majority in the upper house to force the government to submit its plan to the scrutiny of a Senate Committee.

Tuesday 19th February 2008 - 9:00 am

Inflation could approach 4 per cent soon:RBA chief

by Alan Thornhill

Australia’s annual inflation rate could approach 4 per cent by the end of March, according to the Reserve Bank’s Assistant Governor (Economic) Malcolm Edey.

But, while addressing the Committee for the Economic Development of Australia in Sydney, Mr Edey said that was likely to be “a spike.”

He noted that the Consumer Price Index had hit an annual rate of 3 per cent in the 12 months to the end of December.

That is the top end of the Reserve Bank’s target range of 2-3 per cent inflation over the course of a business cycle.

But Mr Edey added a warning.

“However the annual rate was still being held down by a fall in fruit prices at the beginning of last year.

“As the calculation rolls forward, it’s likely that the annual figure could spike to something close to 4 per cent next quarter,” he added.

Mr Edey said that looking through spikes, both up and down, the bank’s estimate is that underlying trend inflation is now about 3.5 per cent.

The bank tries to remove volatile items like petrol and fruit prices from its calculations, when it sets interest rates.

Mr Edey noted that the bank had warned last week that domestic demand would have to moderate if inflation was to be brought back to satisfactory levels.

That was seen as a warning that more interest rate rises are likely.

However, Mr Edey gave no fresh hints about that prospect today.

But he said some factors already operating might help.

Prospects for global growth had weakened.

Household credit had eased.

And the bank expected non farm growth to ease to about 2.75 per cent over the next two years.

Tuesday 19th February 2008 - 5:46 am

Chinalco:the Chinese investment puzzle

by Alan Thornhill

Kevin Rudd is keeping his powder dry on Chinalco’s plan to take a bigger stake in Rio Tinto.

That plan, naturally, is seen as part of the Chinese government’s opposition to BHP Billiton’s plan to take over Rio.

No customer ever wants to see its suppliers merge in ways that would allow them to dominate a critical market.

The media and the opposition have both been pressing the government to explain its attitude to all this.

But Mr Rudd and his Treasurer, Wayne Swan, have both been quite guarded, in their responses so far.

Mr Rudd’s reply, to a radio reporter yesterday, just about covers it all.

Mr Swan, Sunday, released new, somewhat tighter guidelines for foreign investments in Australia.

They stress that Australia’s “national interests” must be fully considered, before any foreign investment proposal can proceed.

Of course, words like “national interest” are delightfully broad.

They mean just what the relevant authority says they mean. No more. No less.

It is the government, itself, which has the last word on these things.

But it usually waits for recommendations of the Foreign Investment Review Board, which is part of the Federal Treasury.

So what, exactly, is Mr Rudd saying about all this?

The reporter had noted that one of the criteria, set by Mr Swan, was the extent to which a prospective foreign investor operates at arm’s length from the government of its own country.

How far, the reporter asked, could Chinalco divorce itself from the will of its political masters?

Politicians sometimes like to answer one question with another.

And that’s what Kevin Rudd did yesterday.

“Well, therein lies the question,” he said.

Well, yes, but not the answer.

“And that is why we have a Foreign Investment Review Board,” the Prime Minister added.

Mr Rudd said he would wait for the board, itself, to make recommendations on this matter.

Tuesday 19th February 2008 - 5:45 am

Australia’s banks face tough times

by Alan Thornhill

The days of easy money are over for Australia’s banks.

As the ANZ noted yesterday, they are now having to make “increased provisions” for bad debts at the big end of town. That’s a direct result of the credit crunch, whose ripples are still spreading from America.

But their troubles don’t end there.

A new survey shows that many of their home loan customers, too, are starting to get into trouble.

That’s a worry. Home lending accounts for a big slices of the business of Australia’s big banks.

The survey, by Datamonitor, shows that 24 per cent of their mortgage holders now expect to find it either “quite hard” or “very hard” to keep meeting their repayments, over the next five years.

And that, of course, implies a substantial risk of default.

Especially as the Reserve Bank seems quite determined to keep raising interest rates, to squeeze inflation.

The worst that can happen, in these circumstances, is a rise in defaults and distress sales.

And that, in turn, could cause property prices to collapse, either locally, or broadly.

There is, of course, no certainty that this will happen.

But there would be plenty of pain to go round, if it did.

The Research firm, Datamonitor, is quite blunt in its conclusions.

“Australian home borrowers experience financial stress,” it says.

Its financial services analyst, Petter Ingmarsson, blames a toxic mix of rising house prices and increasing interest rates.

He said this had caused home loan affordability in Australia to “hit an all time low.”

Staying in the rental market isn’t helping young families much, either.

“High rental costs have also made it harder for many to raise a deposit,” Mr Ingmarsson said.

If we, at Private Briefing, were able to predict how all this will pan out, we wouldn’t be slaving over hot computers, before dawn each day.

We would, instead, be sitting on a beach, somewhere in the south of France, with our feet in buckets of champagne.(Thanks, again, to the late Bert Kelly, for that thought).
What we can say, firstly, is that the present situation in Australia’s housing market is showing some signs that are to be expected of a classic bubble.

And, secondly, Australia’s banks now have major challenges on their hands, both at the debt ridden top end of town, and in their exposure to Australia’s overheated mortgage market.

This, clearly, is a situation in which the Reserve Bank should tread very carefully.

Its record, though, back in the 1980s, when it pursued stop-go policies, shows that it does not always do so.

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Alan Thornhill

Alan Thornhill is a parliamentary press gallery journalist.
Private Briefing is updated daily with Australian personal finance news, analysis, and commentary.

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