Wednesday, April 18, 2012

Industry superannuation chief warns Reserve Bank's inflation focus is damaging economy

By Business editor Peter Ryan

The head of a powerful superannuation body is calling on the Federal Government to rewrite the Reserve Bank's charter, warning that the Bank's primary focus on managing inflation is damaging the economy.

The chairman of the Industry Super Network, Garry Weaven, says that with inflation now under control, the RBA should be using interest rate cuts to boost employment and to drive down the value of the Australian dollar.

Listen to my interview with Garry Weaven broadcast on this morning's edition of AM.

Read the story on ABC News Online.

The former ACTU assistant secretary, who lobbies for superannuation funds including AustralianSuper, Cbus and Hesta, told AM that the inflation targetting mandate imposed when Peter Costello was Treasurer in 1996 is now " totally inappropriate".

"It seems to be still unduly influencing the Reserve in its policies. I know it's very hard to get the balance right, but I think consistently for many years now the Reserve has had far too much focus on inflation only and not enough on full employment and economic prosperity generally, which is their requirement under the Act," Mr Weaven said.

"It's hard to see that the current arrangements are properly co-ordinated. And I think there seems to be little point in having a situation where the Reserve is locked into a sort of single blunt instrument approach and the Government is locked into a political set of parameters."

Mr Weaven said that to the requirement to keep inflation with a two to three percent band over time, the RBA should follow other mandates in the Reserve Bank Act such as ensuring a stable currency, full employment and "the economic prosperity and welfare of the people of Australia."

Mr Weaven suggested monetary policy could be used to trim the high Australian dollar and bolster industry and said the inflation only focus was already hurting the economy.

"I think it clearly does. Notwithstanding the mining boom, we do have signs of real weakness in retail and manufacturing. But more importantly in a way, we have very high interest rates by international standards. And high interest rates push the currency high and that's very, very bad for manufacturers, tourism and some
other industries."

Mr Weaven said the Treasurer Wayne Swan could renegotiate the Reserve Bank's mandate without comprising its independence which he has also questioned.

"It's not much good being independent if all you can do is react through interest rate policy and have no regard for other factors. So at the end of the day no-one is truly independent," Mr Weaven said.

"If the requirements, both for the Government and for the Reserve Bank, is the greatest good of the Australian people and, in particular, the specific requirements in the Reserve Act of full employment, then in the end you must take account of the full picture. And there needs to be dialogue about what you actually do in a policy setting."

Mr Weaven is also the latest to criticise the government's pursuit of a budget surplus, adding to comments by the former Commonwealth Bank chief executive Ralph Norris that it was a "mindless" strategy.

"I think it's very, very difficult. I think it's now almost a political imperative that they deliver that. That's been the result of, you know, 15 years or more of political and economic rhetoric. Given the actual circumstances right today, I think it's hard to argue that a surplus is the main requirement."

Tuesday, April 17, 2012

Interest rate cut tipped for May as Reserve Bank waits on inflation update

By Business editor Peter Ryan

The Reserve Bank has signalled that official consumer inflation data out next week could be the trigger for an interest rate cut in May.

In the minutes from its latest meeting, the RBA board noted that it would focus on the official Consumer Price Index due to be released by the Bureau of Statistics on April 24.

Listen to my analysis broadcast on the ABC's The World Today.

Read the April meeting minutes released today by the Reserve Bank.

"If slower growth in demand could be expected to result in a more moderate inflation outcome, then a case could be made for an easing of monetary policy," the RBA board said in the minutes.

"The board would have an opportunity at its next meeting to review the inflation outlook based on comprehensive data on new prices as well as information on demand and output."

In leaving the cash rate on hold at 4.25 per cent at its April meeting, the RBA board "judged it prudent to evaluate those data before considering a further policy adjustment."

Read my story on ABC News Online.

Financial markets are pricing in a 90 per cent chance that the RBA will cut interest rates by 25 basis points at its May 1 meeting, with some economists tipping a more aggressive move of 50 basis points.

In previous statements, the RBA has repeatedly signalled its comfort with moderating inflation, which is expected to be within the central bank's target range of 2 to 3 per cent in the next two years.

The Reserve Bank also suggested that a softer than perceived labour market could add to the case for a cut in the cash rate.

"Despite the rate of unemployment showing little change for some time, it was apparent that labour market conditions had softened over the course of 2011," the bank said.

"An easing in average hours worked and a decline in the participation rate were indicative of a softer labour market than implied by the unemployment rate."

On the controversial issue of funding costs for banks, the RBA board noted that Australian banks had taken advantage improved conditions to issue a large volume of secured and unsecured debt.

The minutes note "a significant fall" of around 50 basis points in five years, "which would help to alleviate the pressure of higher funding costs in coming months".

However, the RBA board was also briefed on the costs of term deposits for banks, which has sparked a competition war that has seen costs rise materially relative to the official cash rate.

The board also noted that the lingering debt crisis in Europe "continued to be a potential source of adverse
shocks to the world economy" despite risks to global growth having receded in recent months.

However, the RBA says Spain is the new concern in Europe, given the recent decline in the nation's fiscal position and its soaring bond prices.