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GUVNOR OF THE RESERVE BANK

TALKS THROUGH THE BACK OF HIS NECK

- not likely, not maybe, not probably or noticeably but definitely bunkum-

At its meeting today, the part time Board of the Reserve Bank decided to raise the cash rate by 25 basis points to 3.5 per cent, effective 4 November 2009.

 

When you read the vapid and highly qualified statement below you'll appreciate why I've been saying for the last year and half that the Government has to take back the role of setting interest rates and start managing all of the economy itself.

 

LOW INTEREST RATES - WHAT LOW INTEREST RATES?

The po-faced Guvnor of the RBA would have us believe that interest rates are low. That's bunkum - ask any small business owner, ask anyone owning a credit card. What the Guvnor doesn't say is that at a time of record low RBA cash rates, businesses are still borrowing at between 13% and 15%.

 

At 14%, my Commonwealth Bank over draft is 10.5% above the RBA's cash rate. In the year 2000, when the cash rate was around 6%, the over draft was only 11%. The differential, 5%.

 

Amex is charging 21% on its credit cards.

 

So whenever you hear the Guvnor telling us that money is cheap, you know he's talking though the back of his neck.

 

Businesses and consumers of credit are being ripped off unmercifully by the banks and the Guvnor and the Treasurer couldn't give a damn. Credit card rates have hardly missed a beat. Westpac is 18%. Amex is 20%.

 

For anyone who doesn't live in bunkum tower in Martin Place, interest rates are not at record lows. Compared with the cash rate they are at record highs.

 

Stevens writes, 'Housing credit growth has been solid and dwelling prices have risen appreciably this year.'

 

'Has been solid' would have to be the under-statement of the year. Real estate agents' mobile phones are saturated with drool.

 

Prices have been rising at a time when they should have been falling. That the Guvnor should gloss over this point is disgraceful. The rest of us will suffer from high interest rates because Australian governments are doing nothing to slow down the increase in housing prices.

 

While credit for business has been declining, credit for housing, much of it borrowed at low rates of interest from overseas, has increased exponentially, fuelling a housing bubble. How this can happen in the middle of the biggest recession since kingdom come is beyond belief. Goodness knows how the next generation entering adulthood are going to afford to purchase a house.

 

Higher interest rates will suck more money into the country (to inflate the housing industry bubble), increasing the value of our dollar and sending more or our manufacturing to China. No wonder China is kicking along.

 

The higher cost of money will ramp up the inflation the Guvnor is so paranoid about.

 

Stevens and his team of part-timers are completely detached from reality. It is definitely a reserve bank.

 

BLUNTONOMICS

 

Blunt's first law of Bluntonomics

Instead of fine tuning the economy by raising and lowering interest rates, why not fine tune it by raising and lowering taxation -  a percent here, a percent there?

 

-   The money stays in the system instead of disappearing into the banking black hole.

 

-   The innocent are not punished.

 

-   If there needs to be a bit of pain then at least you know the money is going to a good cause

     like the Future and other rainy day funds.

 

-   The pain (or the joy) are shared evenly by the community.

 

When interest rates rise it affects people who are not necessarily the cause of the problem.

 

Blunt's second law of Bluntonomics

Float the currency, float the interest rate.

 

   

Statement by Glenn Stevens, Governor Monetary Policy RBA

The global economy has resumed growth. With economic policy settings likely to remain expansionary for some time, the recovery is likely to continue during 2010 and forecasts have been revised higher. The expansion is generally expected to be modest in the major countries, due to the continuing legacy of the financial crisis. Prospects for Australia's Asian trading partners appear to be noticeably better. Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets. For Australia's trading partner group, growth in 2010 is likely to be close to trend.

Sentiment in global financial markets is much better than earlier in the year. Nonetheless, the state of balance sheets in some major countries remains a potential constraint on their expansion.

Economic conditions in Australia have been stronger than expected and measures of confidence have recovered. Some spending has probably been brought forward by the various policy initiatives. With those effects now diminishing, these areas of demand may soften somewhat. Some types of capital spending are likely to be held back for a while by financing constraints, but it now appears that private investment will not be as weak as earlier expected. Medium-term prospects for investment appear, moreover, to be strengthening. Higher dwelling activity and public infrastructure spending are also starting to provide more support to spending. There have been some early signs of an improvement in labour market conditions. The rate of unemployment is now likely to peak at a considerably lower level than earlier expected.

Inflation has been declining for the past year. In underlying terms, inflation should continue to moderate in the near term, but now will probably not fall as far as earlier thought. Headline CPI inflation on a year-ended basis has been unusually low because of temporary factors, and will probably rise somewhat over the coming year. Both CPI and underlying inflation are expected to be consistent with the target in 2010.

Housing credit growth has been solid and dwelling prices have risen appreciably this year.

 

Business borrowing has been declining as companies have sought to reduce leverage in an environment of tighter lending standards. For many business borrowers, increases in risk margins are still coming through. The decline in credit has been concentrated among large firms, which have had good access to equity capital and, more recently, to debt markets. Share markets have recovered significant ground.

The Board noted that the rise in the exchange rate is likely to constrain output in the tradeables sector and dampen price pressures.

 

Nonetheless, growth is likely to be close to trend over the year ahead and inflation close to target. With the risk of serious economic contraction in Australia now having passed, the Board's view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker. The adjustments at the October and November meetings will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.

 

 

 

So there you go. Now you know it's not likely, not maybe, not probably not noticeably or even close to being bunkum. It is definitely bunkum.

Frank Blunt

Syndicating columnist

Bunkum.com.au

November 2009