Home > Economic policy, Oz Politics > Leaning on the bank

Leaning on the bank

October 26th, 2007

Today’s Fin reports that Howard, Costello and Vaile are all leaning on the Reserve Bank not to raise interest rates at its Tuesday meeting. Howard and Costello are arguing that the Bank is obliged to focus on headline rather than underlying CPI movements, while Vaile is claiming that there is a convention of not increasing rates during a campaign. Costello’s warning of an economic tsunami heading for our shores can be seen as more of the same.

This seems both desperate and self-defeating. After the inflation figures, the government’s best hope was that the Bank would share the view that the uncertain global situation made a rate increase undesirable. Ideally, some hints to this effect from the Bank would promote the view that we should stick with the economic managers we know. But now, any such decision will be seen as buckling to government pressure. That makes it more likely that the Bank will raise rates, and ensures that, if they don’t, it will be a political negative for the government.

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  1. Bring Back CL’s blog
    October 26th, 2007 at 10:21 | #1

    I’m staggered at how bad this tactic is. It is a lose/lose and shows up the panic they are in.

  2. October 26th, 2007 at 11:08 | #2

    We wouldn’t have these problems if interest rates floated. Free markets should not have central bank and this is one area where we really should have a free market.

    Alan Greenspan gave the game away in the following interview last month:-

    http://alsblog.wordpress.com/2007/10/18/free-markets-dont-have-central-banks/

  3. al loomis
    October 26th, 2007 at 11:30 | #3

    just out of idle curiosity, terje, who prints the money in your nation without a central bank? private bank notes have been tried, did you know?

  4. craigmalam
    October 26th, 2007 at 11:33 | #4

    I would have imagined that a mandate to be unaffected by political statements would require the Bank to do whatever it considers is best, even if this gives the appearance of buckling. I’ve always found this kind of thing interesting within other debates about a ‘frank and fearless’ public service. If bureaucrats agree with their political masters then are they somehow affected? Not always, and logically, not necessarily.

  5. conrad
    October 26th, 2007 at 12:25 | #5

    “private bank notes have been tried, did you know?”
    Can you clear up what you mean by that?
    Do you mean like those currently used as the main currency in Hong Kong and Scotland? or do you mean like from a more historical perspective, such as since the invention of paper money in China?

  6. October 26th, 2007 at 14:35 | #6

    Al Lomis,

    Private banks generally. And of course the treasury department could issue bearer bonds if the value for the national “unit of account” was defined by law in terms of some tangible market commodity or basket of commodities (as Keynes proposed with the Bancor).

    The point is that the credit speculators should bid against eachother to set the price of credit and not against shifts in central bank policy. This price should not be the political pawn it has become.

    Regards,
    Terje.

  7. sdfc
    October 26th, 2007 at 14:49 | #7

    Yeah wildly fluctuating short-term interest rates sounds like a good plan.

  8. observa
    October 26th, 2007 at 16:00 | #8

    Why on earth would you want to raise interest rates when the dollar has broken through 91c US, unless you feel by helping to further increase its purchasing power, that will help fight inflation by further decimating the export industries facing elastic international demand. Why shouldn’t Howard and Costello rail against raising rates, at a time when commentators in the US are calling for the US Fed to cut theirs? What special insight our Reserve bunch of suits has into this ludicrous mess, is anyone’s guess. Perhaps Howard should toss and Peter call.

  9. Merri Creak
    October 26th, 2007 at 16:06 | #9

    Observa, the dollar has broken through 91 cents because interest rates are likely to rise – I’d suggest that the dollar won’t be going up if an interest rate rise is announced on Kyneton Cup Day, although it is likely to fall if one isn’t announced.

  10. observa
    October 26th, 2007 at 16:59 | #10

    A mate in the export reefer trade just enquired of a large shipper this week about an update rate to a particular destination. Got the rate and queried the price hike. No I’ve quoted you Aussie dollars came the reply for the first time in years. Fasten your seat belts mateys.

  11. al loomis
    October 26th, 2007 at 17:06 | #11

    terje, and conrad: i was reminded that in the early days of the usa, and csa too, private banks printed all kinds of funny money.

    most offered to exchange x-weight of gold, or silver, or cotton for each dollar. the opportunities for scams were endless, and simple incompetence or plain bad luck brought many of these banks undone. clients sought political relief in government management.

    in short, there’s good reason for central banks and tight regulation and the more tightly knit and far spread the range of commerce, the better the reason.

    they’re here to stay, barring catastrophic collapse of world society.

  12. sdfc
    October 26th, 2007 at 22:23 | #12

    Why would you want to raise interest rates Observa?

    Well you can try underlying inflation, which the government seemed to think was alright last year, being at 3.0% YOY and a six month annualised rate of around 3.5%.

    Or what about the headline rate which the government is so fond of all of a sudden? Yeah sure the annual rate is only 1.9%, but with six months of flat growth set to drop out of the equation, that’ll rise sharply. The inflation target is forward looking.

    Shall we add the ridiculous fiscal stimulus to an already booming economy? Or is it an overly cautious central bank raising rates too slowly with the result rates will rise further than they should have?

    The last thing we need is for the RBA to dilly dally anymore, what we need is for the RBA to ignore political considerations and get on with the job.

    Imagine if Rudd or Swan had made an implied threat to the RBA, it would have been the end of civilisation as we know it.

  13. October 26th, 2007 at 23:31 | #13

    I thought that the main feature of the Australian Reserve Bank system was the independence of the RBA, not its amenity to the opportunistic whims of politicians. I think the discussion so far has not dealt directly with this issue.

    sdfc says, “Imagine if Rudd or Swan had made an implied threat to the RBA, it would have been the end of civilisation as we know it”. Yes! Imagine this indeed! So, I assume that no one should have the right to manipulate the RBA to do what the government wants it to do for an election.

    I think it is outrageously improper for the Howard/Costello team to threaten the RBA. These people have little respect for the rule of law and have flouted every conceivable rule to get themselves re-elected. IU must repeat here that we should regard these people as so far beyond the pale that they should be out of public life.

    Having claimed in 2004 that the Howard government would keep interest rates low (albeit for 2 days only, as John Howard now says – unapologetically), they are having difficulty with the fact of RBA independence. They don’t like to be caught out with a huge lie that won them the 2004 election, the lie that the government has the power to control interest rates. But they have been caught out!

    Hopefully, if we can get everyone to remember this we can leave this piece of silliness out of future elections. I bet we will be arguing about this again in three years’ time as though nothing happened. Being cynical is a sad trait – but I can’t help it.

    Willy Bach
    Greens candidate for Griffith

  14. observa
    October 27th, 2007 at 04:27 | #14

    Noble sentiments Willy, which assumes central banks around the world have been acting antiseptically and mechanically in our best interests. That notion is strongly challenged by Austrian economists, who have been consistently banging on about the ‘tsunami’ of credit they have created, that will engulf us all. There is none better than Gerry Jackson to understand that view here-
    http://www.brookesnews.com/072210ms.html
    When Greenspan was recently perplexed that central banks had lost control of interest rates, the Austrians would have wry smiles. If Govt, via the Treasurer’s portfolio was directly responsible for monetary policy there would be no argument. Let any govt decide between targetting interest rates or money supply and see which competing ethos works best eh?

    As for our Reserve raising rates, it will have a supporting effect on our dollar and this is the result
    http://www.news.com.au/business/story/0,23636,22656795-31037,00.html
    You happy with that Willy? Now the Austrians would say the dilemma the Reserve has now in raising rates to curb inflation is because of past credit creation profligacy. Time to punish Australian auto workers and the like for that now eh Willy?

  15. BilB
    October 27th, 2007 at 07:35 | #15

    Willy B,

    Independence of the reserve bank, as you suggest, is independence from all sides, public and private. There are many interests that would like to manipulate money management for profit.

    Observa,

    Your Gerrard Jackson has lost himself in the chicken and egg argument. There is just a nano second’s difference between production and consumption. His argument falls on his failure to register the inverse of each of these features. Both supply and demand have negative aspects.

    A tsunami of credit is created entirely by the institutional manipulation of retirement savings on the one hand and the disparity of national return on money opportunities between countries. Not by reseve bank policy.

    And the dollar? The reserve bank has no real power over that. It would cost more than the car makers are worth for the reserve bank attempt to manipulate the Australain dollar for their benefit. (refer paragraph 1) The best thing that the car makers can do is to us Terge’s philosophy and print their own money and revalue their product that way. Oh! wait, Ford already tried that with their cash back and years petrol and, and ,and….and it did not work, in America anyway. It might work here.

  16. observa
    October 27th, 2007 at 09:46 | #16

    Meanwhile BilB, the punters are getting pretty nervous about something or other…
    http://www.news.com.au/business/story/0,23636,22656917-31037,00.html

  17. observa
    October 27th, 2007 at 09:50 | #17

    As the Austrian’s cease their wry smiles and start shaking their heads.

  18. conrad
    October 27th, 2007 at 10:15 | #18

    AL: I’d be interested to see some sort of historical analysis of whether private currency is really somehow worse than that of central banks. Obviously there has been funny money issued from private banks, but it isn’t hard to think of the same thing occuring from central banks either. Any pointer to a a good reference would be appreciated.

    I guess a more simple way to look at it is, would I rather trust a big multinational (say like HSBC who prints money for HK — although I am not sure if the government secures it), whose motive is just to make money, but needs a good reputation in multiple countries to do business (which I do already with options, bonds,my savings etc. anyway), or a government with political motives that only needs to satisfy a single group of people?

  19. BilB
    October 27th, 2007 at 10:27 | #19

    Observa,

    I’m really impressed that you can see a way for the Australian Reserve Bank to restore the value of the US dollar and bring oil prices down.

    Spill!

  20. observa
    October 27th, 2007 at 11:16 | #20

    It’s far too late to contemplate any of that now BilB with all that funny money sloshing about and our Reserve’s guilt by long association with central banks around the world. Lash yourselves to the gunnels mateys, it may have finally formed into that Austrian tsunami.

  21. observa
    October 27th, 2007 at 11:21 | #21

    The other possibility is of course a huge inflationary swell and we’ll ride it out.

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