RBA rate rises leave Rudd in a bind

Peter Martin

March 2, 2010

Comments 4

The Reserve Bank believes we're out of the woods.

Its statement released after today's board meeting says "labour market data and a range of business surveys suggest growth in the economy may have already been at or close to trend for a few months".

The Treasurer Wayne Swan doesn't buy it.

Asked at a press conference minutes after the announcement whether Australia had returned to trend growth he replied "it depends who you talk to".

"If you are in resources the outlook is quite bright, there is no doubt the economy is strengthening. But if you see some of the data, parts of the economy are still soft. I'm still cautious if you like. I am confident but I am certainly not complacent."

There are two good reasons for the Treasurer to be cautious. One is that the Treasury is cautious.

Its calculations suggest that were it not for the stimulus the economy would be going backwards. It would have shrunk 2 per cent in the year to September instead of growing 0.6 per cent. And the stimulus is being wound back day by day.

The business investment tax break that flooded our docks with cars ended in December. The First Home Owners Boost ended that month. The green loans program was axed in February and the home insulation scheme was suspended at the same time. It's easy to see why it's worried things will get bumpy from here on.

Solemn commitment

The other reason is a solemn commitment that may soon become operative. Swan, Lindsay Tanner and Kevin Rudd have promised to hold real spending growth to 2 per cent per year once economic growth returns to trend, and to hold it there during the five or so years it will take to return the budget to surplus.

If growth were already back to trend, the commitment would become operative in the next budget.

If they can show that it is not, they buy time. They will be able to spend without that restraint in an election year and at a time in which they think the economy will need it.

The Bank concludes its statement saying that with "growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average".

Its decision to boost the cash rate from 3.75 per cent to 4.00 per cent is "a further step in that process".

The Treasurer and the Treasury aren't so sure.

Peter Martin is The Age and Sydney Morning Herald's economics correspondent.

4 comments

Read between the lines...

Mr Stevens has only the big stick of interest rates, plus a modicum of jawboning, to keep the inflation genie at bay and cool off some of the crazy malinvestments that are currently going on (intended to make GDP look at any cost by the govt)
Meanwhile we have Rudd and co spending like drunken sailors on everywhere but productive enterprise (cf pink batts, double priced school tuckshops, $900 cash giveaways, pumping up existing house prices with more subsidies, our crap car industry to name but a few), and a heavily politicized Treasury providing all the "supporting evidence" to do same.....So we have a massive misallocation of the nations wealth (more than 4% of GDP) being sprayed around and it WILL cost all of us in the future...more tax and higher inflation..

Who do you trust to do the right thing by the nation? Rudd and Swan, or Stevens...

Commenter

Enrico

Location

Sydney

Date and time

March 02, 2010, 4:08PM
Does the left hand really know what the right is doing? The independence of the RBA is one thing but what is the point of one hand stimulating the economy on borrowed money while the other mops up excess liquidity. Some one is starting to make Gordon Brown look good!

Commenter

Rodders

Location

St. Leonards

Date and time

March 02, 2010, 4:11PM
Stevens & Co killed the economy with unnecessary rate rises 6 months before the GFC over a pre-occupation with inflation and they are about to kill the recovery. It seems we have a RBA board with no feel for what is really going on at the small business and blue collar level (much the same as Treasury and Rudd & Co). Employment reaching capacity? By what measure? Working 1 -2 hours per day being counted as employment? On this basis all data being fed to these lofty decision makers is jaundiced against the reality in the street. Roll on election time to let us have a say on what we think of Rudd & Co. But unfortunately Stevens and the rest of his Board does not seem to have any accountabililty to the voters for mishandling the economy. Who appoints these people?

Commenter

Struggling

Location

Parramatta

Date and time

March 02, 2010, 4:43PM
Must be kidding. Most small business and others deal with struggling. The RBA; Canberra always 3-4mths behind real economy.

Banks are tightening not loosening.
Must be very very careful with future rate rises as in Sydney; Qld and outer Wst Melb very tight conditions.

Reality Check

Commenter

gEOFF

Location

Melbourne

Date and time

March 02, 2010, 7:35PM