Apr 042007

So, the RBA has left interest rates alone. For the time being. Was it the right decision for today’s economy, where disposible income is almost entirely absorbed in debt maintenance? Where a balance of trade deficit continues to exist despite a supposedly booming economy?

Bannerman considers this decision to be one of convenience, rather than necessity. While the Reserve Bank of Australia might well be independent of governmental influence, it’s board is very much aware that this year is an election year. A 25 basis point rise today would have been the sensible thing to do from the perspective of maintaining a tight rein on inflation, albeit an unpopular decision from a political and community view.
The Australian economy is currently on a knife edge and teetering towards steadily increasing inflationary trends as a direct result of the one element which has provided so much bouyancy to date. The much touted resources boom. Wages growth has averaged at 4.0% to the half-year ended December 2006. The so-called line-in-the-sand used by the RBA to judge when enough is enough is reputed to be 4.5%, when measuring the need for an exercising of monetary policy.
As identified on Radio National’s PM program yesterday, the aggregate wages figures are hiding gross inequities, as averages tend to do. In the mining and resources sector, wages growth is running at 6.5%, while in hospitality and retail sectors, only 2.5% which is under the current rate of inflation at 3.5% per annum. Interestingly, the RBA’s preferred benchmark for inflation stands between 2.5% and 3%, and yet today the board was unwilling to apply monetary pressures. Very interesting and somewhat revealing. The question needs to be asked, as to just why the board chose not to move.
Was this decision taken with political criticism of a rate rise in mind, or was it taken as a salve to those sectors which, as shown above, are actually in negative wages growth? Granted the mining and resources sector is small in comparison to retail, hospitality and services sectors, however the acceleration in wages growth in mining & resources is quite dramatic. Coupled with what the government says is the ‘bees-knees’ low unemployment results – which aren’t all that accurate anyway given the retiscence in government circles to release their own statistics – wages growth as a whole can only move upward due to the lack of skilled labour in the workforce at present.
If the federal government were to come clean on the real statistics behind the unemployment figures, we’d be seeing at least as many unemployed again on top of the quoted results through those who simply can’t get work due to age or lack of skills, and those who work part-time on 20hrs/week or less. Of course, in an election year, we’re not likely to see those figures.
Bannerman considers today’s decision to be little more than a cop-out on the part of the RBA board. Doubtless the decision was made on the back of unease at what the politicians might say had the board adopted a 0.25% rise in rates. That criticism might well have appeared sound, given that March quarter results are not yet available for the Bank to rest upon. Rather than appear trigger-happy, it seems the board has opted to wait until those results are available.
On the subject of what the politicians might think, Bannerman considers Howard’s insinuation into the argument of the statement –

‘interest rates were lower on average under the Coalition than under Labor’

– to be the heights of disingenuity. Especially given that had rates risen today to 6.50%, that rate would have been the highest since November 1996. Over the period January 1990 to December 1996, interest rates averaged 9.42%. Over the term of the coalition government, rates averaged, to date, 5.33%. So, what Howard claims is quite factual, in that averages hide realities. What he won’t reveal, and which is freely available for some casual analysis on the RBA website is the associated debt to disposible income percentages.
Over the period January 1990 to December 1996, average debt-to-disposible-income ran at 57.2%. Over the period under conservative rule, that same percentage has averaged 112.9% and rising. As at December 2006, that percentage stood at 158.7%. If ever there was a need to realise that we’re living beyond our means, that time has surely arrived. As any banker knows, interest rates are not the governing factor in borrowing. The real controlling factor is the ability to sustain that borrowing over the longer term. Given these hard facts, it’s impossible for any knowledgeable observer of economic matters to agree with Howard when he claims his government has satisfactorily managed the Australian economy. Since 2000 the domestic economy has been imitating a runaway debt truck looking for a place in history to have a monumental crash.


Poetically judicial really, given that Howard touted a debt truck as his very own 1996 election stunt.

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