I hope they know who to blame

The upcoming interest rate rise, which will provoke weeping and gnashing of teeth in many quarters, is due to one thing only:

RESERVE Bank governor Glenn Stevens has flagged plans to push up interest rates to manage ”the largest minerals and energy boom since the late 19th century” and made it clear he will not hold off to protect states such as Victoria despite their distance from the big mines.

Addressing a business audience in Shepparton, Mr Stevens said he had ”very effective control over only one interest rate”, and that he would need to push it up nationwide to manage a boom he conceded was emanating from Western Australia…

He said the bank had only one instrument with which to manage the ”fairly robust upswing”, and the entire nation would have to wear the consequences.

That’s right: everyone who opposed any kind of meaningful mining tax. Everyone who told pollsters they were so opposed to the RSPT that Labor would have to get rid of Kevin Rudd. Everyone who voted Liberal. You wanted a two-speed economy – welcome to the consequences. If we don’t want our politicians to sensibly manage the mining boom on behalf of all of us, the RBA will have to do it with the one single instrument it has at its disposal – raising interest rates for the entire nation.

Isn’t this descent into a country with an unbridgeable and ever-worsening gap between rich and poor exciting?

11 responses to “I hope they know who to blame

  1. There was another quote in that speech (which I cannot find right now) about how having a currency which is universal necessarily means that monetary policy cannot be targeted. This idea that monetary policy should only consider those who are at the margins would be a return to basically what was done when the executive controlled the policy which was a complete and utter disaster (i.e. too slow, too small). But are the conservative thinkers here pushing for a return to those days or not? Furthermore, it can hardly be said that a rise in the cash rate was totally unpredictable. Anyone who hasn’t budgeted for that would be considered fiscally irresponsible. But these people seem to be the ones the fiscally responsible conservative movement are advocates for. Conservative politics confuses me greatly.

  2. Jeremy,
    I’m a strong supporter of a mining tax, but I find it difficult to believe that the decision to amend the RSPT to become the weaker MRRT can be blamed for the imminent rate rise(s).

    This is for a few reasons.

    1) The tax was never going to take effect until 1 July 2012.
    2) The RBA commodities price index and the terms of trade are now both at all-time highs.

    I think you’re right that over the longer term a resource rent tax can serve to equalise some of the disparities in growth between industries and regions, but I think you’re wrong to suggest that rises in the short-term can be ascribed to the weakened mining tax.

  3. the thing is though, if we’re in such a mining boom, why is inflation decreasing? the profits clearly arent going to average aussies, its getting shipped straight to London.

    and how will lifting rates curb the mining boom? BHP, Rio Tinto etc all have access to the international wholesale borrowing market. they dont go the local NAB branch and ask for a loan.

    and finally why would the governor of the Reserve Bank made such elementary comments about monetary policy? of course they cant target one industry. whats his next speech going to be.. the definition of a central bank?

  4. jordanrastrick

    What Matt and to an extent Austin said.

    and how will lifting rates curb the mining boom? BHP, Rio Tinto etc all have access to the international wholesale borrowing market. they dont go the local NAB branch and ask for a loan.

    Of course, NAB also has access to the wholesale borrowing market. And BHP can borrow all it likes from international financiers but will need debt denominated in $AUD from somewhere if it wants to pay its staff and local suppliers. And there are a whole bunch of secondary economic factors flowing out of the mining boom like the demand for new housing in WA and financing of small businesses that supplement the mining sector and borrowing to pay for local rail and road and port infrastructure needed to facilitate the mining trade etc etc which are directly impacted by Australian rates.

    But maybe you’re right, and the Governors of the Reserve Bank are idiots who don’t know anything whatsoever about monetary policy.

    and finally why would the governor of the Reserve Bank made such elementary comments about monetary policy? of course they cant target one industry. whats his next speech going to be.. the definition of a central bank?

    I think, first of all, because this point while elementary has perhaps been a little overlooked in recent years (see Greece), and they want to make it crystal clear they’re aware of its implications.

    Second, the Reserve Bank’s words concerning interest rates are all closely scrutinised by everyone from highly theoretical economists through to other government and private sector policy wonks, politicians, laypeople, and finally journalists, who then interpreted them for all those voters out there who only want to know why their mortgage is going up, in plain English if you don’t mind. Its a pretty broad audience, and it probably doesn’t hurt to clarify the fundamental aspects of their reasoning from time to time. Y’know, just in case there is anyone out there who doesn’t understand anything whatsoever about monetary policy.

  5. “how will lifting rates curb the mining boom?”

    It won’t. That’s not the idea of monetary policy. The idea is to control the supply of money (whatever that means; M0, M1, M3, Broad Money, who knows) so that it’s purchasing power over the medium-long term is maintained. The “mining boom” as it is called is a stimulus from abroad with much the same effects as fiscal stimulus (i.e. multiplier, etc.). As incomes rise then the supply of money needs to be tightened to offset the increase in velocity associated with the income rises (viz. more borrowing and consumption). So even though mining corporates can raise funds from abroad, which would be a bit more risky now with the high AUD, it’s the effects on the rest of the domestic economy due to the “mining boom” that are being targeted.

    Also note that the terms of trade was much lower 12 months ago. Most of the proceeds of the rise in this over the last year wont trickle through for a little time as dividends haven’t been paid, all wage contracts haven’t been negotiated yet, and much of the material hasn’t actually been mined but are under very high price, long term contracts.

  6. im not assuming the Governor is an idiot, far from it. Im merely suggesting the reasons he gave for lifting interest rates are bullshit.

    everyone’s aware of the theory that the mining boom is meant to causing prices to go up, through wages etc. but the facts dont support it, inflation is going down. as marvin the martian said, wheres the kaboom?

    aussies arent swimming in mining monies. they are saddled with enormous debts. huge, nearly unservicable debts. you know, something a governor of a reserve bank would probably want to talk about. if they weren’t trying to talk about other things.

  7. karl – Is that your observation of the recent past or prediction for the future? Monetary policy should be made before things run away and not afterwards. If you are suggesting that in the next few years inflation will not be higher (outside the target range) in Australia given the current policy, then I think you’d be in the vast minority. Fiscal responsibility in the micro-economy is completely different issue, not one for monetary policy.

  8. no, as I mentioned, I’m only suggesting the reason given for increasing interest rates is suspect. He’s discussing the possibility of inflation because of a mining boom.. that has already been happening for years. Im no economist, though.

    but it concerns me when major issues like household debt levels are not mentioned at all. are you saying that the Reserve Bank shouldnt look at household debt when setting interest rates? their obligation includes “the economic prosperity and welfare of the people of Australia”

    surely the fact the aussie are leveraged to the eyeballs might merit some discussion. or should we be happy with Glenn giving textbook explanations of “what is monetary policy”?

  9. What they _shouldn’t_ do is follow this line of thinking: “Some households have high debt levels, we should consider economic welfare as meaning nobody defaults on their debt obligations, therefore let’s not change the cash rate even with all the evidence in front of us on future inflation”. That’s essentially a return to the executive’s political control of interest rates that we’ve moved on from.

    The overall quantity of household indebtedness should inform the central bank of responsiveness to interest rate changes. I’ve said before (not in this place) that they should move to smaller increments in changes rather than 25 basis points given the higher levels of leverage these days.

    If we want to save particular individuals from any fiscal misadventure, then that falls well outside the responsibility of the central bank.

    Also, I think it’s appropriate given the general level of knowledge that journalists possess that Stevens regularly give textbook explanations of how and why they make decisions.

  10. Gotta love the banks 😦

    Oh noes. the inaccurate employment rate is now at the magical %5. We must raise rates!!!!!

  11. he should be acknowledging the real issues, not getting distracted and going for space walks like mr squiggle

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