Blame Martin Place III
The statement accompanying today’s increase in official interest rates on the part of Reserve Bank confirms what was already effectively implied by the Q3 CPI outcome:
By the March quarter of next year, both headline and underlying measures of inflation are likely to be above 3 per cent.
This forecast presumably includes the anticipated impact of today’s tightening. The RBA will be unable to publish a target-consistent inflation forecast in its November Statement on Monetary Policy. The RBA is effectively admitting to a monetary policy mistake. It is Governor Stevens rather than John Howard who should be in the dock.
The question that has to be asked now is, what path will official interest rates have to follow to bring the inflation forecast back into the 2-3% target range? On this, the RBA was characteristically silent. There is really no excuse for the RBA failing to spell this out in today’s statement or next week’s quarterly Statement on Monetary Policy. The RBA continues to short-change the public with its lack of transparency in relation to its future policy intentions. The Bank is only making its job harder, by robbing itself of the ability to let market-determined interest rates do some of the required tightening work. Interbank futures are still giving less than a 40% chance to a follow-up tightening in December.
posted on 07 November 2007 by skirchner in Economics, Financial Markets, Politics
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Who’s to Blame for Higher Interest Rates?
Andrew Norton notes a Gallaxy poll on interest rates:
‘If interest rates rise again in the near future, which of the following do you believe is mainly to blame?’
The political answer, John Howard, received blame from only 12% of respondents - 17% of Labor voters and 3% of Coalition voters. The other responses were ‘international factors’ (37%), the Australian economy (30%), and the Reserve Bank (14%).
‘International factors’ and the ‘Australian economy’ happen to be the most correct answers. It suggests that the electorate are actually much less parochial than the commentariat and also understand the endogeneity of interest rates to economic conditions. If the electorate can grasp these basics, what’s the commentariat’s excuse?
posted on 06 November 2007 by skirchner in Economics, Financial Markets, Politics
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Equines and Equities: The Cup Day Effect
Alan Wood considers the Melbourne Cup Day effect:
Worthington applies econometric techniques to isolate the impact of the Cup from the other stock market anomalies, such as the day-of-the-week effect, mentioned earlier. He studies closing prices on the
Australian Stock Exchange over the 45 years from January 3, 1961 to December 30, 2005 - 11,327 trading days. And what does he find? Stock market returns on Melbourne Cup day are not only significantly higher than on any other Tuesday in November, but also higher than on any other Tuesday of the year.
They are also higher than Monday, Wednesday, Thursday and Friday returns throughout the year, and less volatile.
In short, the Melbourne Cup is associated with abnormally high returns on the Australian stock exchange. On Melbourne Cup day in 2005 alone, the Cup was associated with abnormal gains of more than $2 billion.
posted on 06 November 2007 by skirchner in Economics, Financial Markets
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State Capitalism: The Rise of Sovereign Wealth Funds
Alan Wood discusses some of the issues around the emergence of sovereign wealth funds, including Australia’s Future Fund:
An emerging theme in international discussion is the return of state capitalism. After decades of privatisation and the retreat of government from state ownership of enterprises, sovereign governments are becoming a major force in global asset markets…
Although most Australians don’t realise it, Peter Costello’s Future Fund, perhaps soon to become Kevin Rudd’s plaything, is a sovereign wealth fund. And in a world where the lack of transparency and accountability of sovereign wealth funds is a major concern, it is open to criticism…
Their assets are already larger than hedge funds ($US1 trillion to $US1.5 trillion) and private equity funds ($US700 billion to $US1.1 trillion).
And their assets are growing rapidly.
Standard Chartered estimates they could total $US13.4 trillion in a decade. They already hold over 1 per cent of the world’s total stock of equities, bonds and bank deposits and could hold 5 per cent or more of the global stock of financial assets in a decade.
posted on 03 November 2007 by skirchner in Economics, Financial Markets
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More Hints of Possible RBA Reform
More hints of possible RBA reform under Governor Stevens:
Reserve Bank governor Glenn Stevens has refused to rule out changing the RBA’s current policy of not publishing board minutes.
At a speech in Sydney on Wednesday night, Mr Stevens said he had an open mind on the publication of minutes, but would want any policy change to ensure that the robustness of boardroom debate was not crimped.
posted on 01 November 2007 by skirchner in Economics, Financial Markets
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DIY CPI
Australia and New Zealand are among the few developed countries not to publish a monthly CPI, producing a quarterly series instead. In Australia, the ABS have always argued that a higher frequency CPI does not stack-up on a cost-benefit basis. Yet it would seem most unlikely that the cost-benefit calculus in Australia and New Zealand would be substantially different from the many comparable countries that somehow manage to produce a monthly CPI.
In Australia, TD Securities and the Melbourne Institute have teamed-up to produce a monthly CPI, that has a low tracking error with the official series.
The National Bank in New Zealand are now looking to do something similar and are calling for help from fellow kiwis:
There seems little appetite across policy circles for producing a monthly CPI. So we are going to take it upon ourselves to fill the void. To do this we need your help. For simplicity we’re going to limit ourselves to a domestic or non-tradable inflation measure. The technological age means it is possible to capture many areas of domestic inflation via the internet, which we’ve already started doing. Alas we have gaps, and need your help. So if you’re engaged as a medical practitioner, dentist, mechanic, plumber, electrician, builder, vet, lawyer, accountant, real estate agent, property maintenance, gymnasium, early childhood centre, physiotherapist, or hairdresser (yes we know this is a long-shot), we’d love to have your input. Full confidentiality conditions would apply and we’ll use technology to make responding easy just like the Business Outlook. Just email cameron.bagrie at nbnz.co.nz if you are prepared to help the nation out!
posted on 31 October 2007 by skirchner in Economics, Financial Markets
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RBA Reform Under Rudd?
Opposition Treasury spokesman Wayne Swan flags possible changes to the appointment process for the RBA Board under a prospective Labor Government:
“I am very interested in talking to the reserve bank governor about a new method, open and transparent, of appointing the best possible person available.”
Mr Swan said he would seek the advice of current reserve bank governor Glenn Stevens to discuss ways of implementing a more transparent appointment process.
“I would seek the advice of the current reserve bank governor in constructing a process that would do that,” Mr Swan said.
“We have a number of ex-reserve bank governors around the country, maybe we can put a panel together where they could put together a list of names, for example.
“I want an open transparent process that gives the best person for the job, irrespective of their political affiliation or what fundraising they have done for any political party.
Instead of overhauling the appointments process for the Board, a more significant reform would be to bring the RBA into line with the practices of other central banks and separate monetary policymaking from the Board and place it into the hands of an expert committee, made up of the Bank’s senior officers and outside appointees and excluding the Treasury Secretary. The monetary policy committee should then be required to release a summary of proceedings and a record of any votes taken at the conclusion of each meeting. By ensuring a high degree of transparency, there is less of a burden on the appointment process in maintaining the integrity of monetary policy, since the behavior of committee members would be subject to a degree of scrutiny that is entirely absent under current arrangements.
posted on 30 October 2007 by skirchner in Economics, Financial Markets, Politics
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The Business Spectator
The Business Spectator has finally launched and promises to provide a welcome alternative to the unreadable Australian Financial Review:
Now you’ll never have to wait (or pay) for the news (or analysis) that counts. Business Spectator has filled the gap, providing Australians with real-time business news and commentary 24 hours a day, seven days a week.
The Business Spectator also includes a moderated, blog-style section called The Conversation:
The Conversation will combine the best elements of a letters-to-the-editor page, a blog, an online forum and a roundtable discussion. We want to create a place where Australia’s business community can exchange views, react to the news or set the agenda.
posted on 30 October 2007 by skirchner in Culture & Society, Economics, Financial Markets
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Tax Cuts and Interest Rates - Again
Terry McCrann continues to do battle with the ‘tax cuts lead to higher interest rates’ brigade:
what would have happened if the Government had taken the advice of, in particular, Access Economics and tried to bank them.
Since that 2005 budget which projected a $9 billion 2008-09 surplus—itself after spending $10 billion in the 2008-09 year. That’s to say, the projected 2008-09 deficit even back then could have been $19 billion but for the 2005 tax cut.
Since then the Government has spent a further $50 billion, in the 2008-09 year alone. If not spent, ceteris paribus it would now be projecting a $63 billion surplus for that one year. With similar huge surpluses for this year and the other years in the budget forecasting framework…
Macquarie Bank’s Rory Robertson seems to think he’s rediscovered the fiscal wheel, by arguing that the tax cuts have been fiscally stimulatory. Well, looked at in isolation, of course they are, Rory. Looked at in the totality of revenue change from one year to the next, not having them would have been contractionary. If you think going from a $15 billion surplus in 2005-06 to a $63 billion surplus in 2008-09 would equate to fiscal neutrality, Rory, we will have to agree to disagree.
Interest rates are as high as they are, and heading slightly higher, not fundamentally because of the tax cuts, but because of the seminal upshift in our prosperity of which the surging budget revenues that fund the tax cuts are the manifestation.
McCrann argues that ‘analytically it is beyond absurd to suggest the Government could have in theory sat on a $63 billion surplus.’ Indeed, with Commonwealth debt paid off, the government would have little choice but to recycle these surpluses via the accumulation of assets in the Future Fund. Unless the bulk of these funds were invested offshore, the government would over time effectively nationalise a large share of the domestic stock of equity capital.
posted on 27 October 2007 by skirchner in Economics, Financial Markets, Politics
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The Conflicted RBA Board
Brad Norrington notes the conflicts of interest sitting around the RBA Boardroom table:
ROGER Corbett faces a potentially excruciating choice when he enters the board room of the Reserve Bank in Sydney’s Martin Place on Melbourne Cup Day, less than two weeks away…
two sides of Mr Corbett’s brain will be talking to him: the independent banker and the hard-headed businessman.
Mr Corbett may no longer head Woolworths, but he still serves as a consultant to the giant retailer.
And Michael Luscombe, Mr Corbett’s successor at Woolworths, has made his view plain: there is no case for a rate rise because the inflation rate at Woolies stores does not justify it…
That courage could only make life more difficult for Mr Corbett and others in his position on the board whose business interests could be affected by the decisions they make. The three permanent members of the Reserve Bank are Mr Stevens, his deputy Ric Battelino, and Ken Henry, the Secretary to the Treasury.
The six others, including Mr Corbett, are external board members and most have links to big corporations that do not want an interest rate hike.
Unlike the US Federal Reserve, which hands out statements every time it holds a meeting and releases deliberations of its minutes every six weeks, deliberations of its Australian equivalent remain secret. When the Reserve successfully tried to block The Australian from seeing its minutes in 2004, former board member Dick Warburton said the release of such information would expose external directors to “undue criticism and pressure from the sectorial groups they nominally represent”.
What transpires in the boardroom may never be known, but the pressure from retail business interests on Mr Corbett and his corporate colleagues inside the room is undeniable.
What makes the RBA exceptional among central banks is not so much the lack of minutes, but the failure to separate monetary policy decision-making from the other governance functions of the Bank Board.
In the US, the Federal Reserve Board and the Federal Open Market Committee have distinct functions, with the latter determining interest rates (indeed, there is no formal requirement that the Fed Chair also Chair the Open Market Committee). The RBA’s actions before the AAT in seeking to block access to the Board minutes highlighted the incompatibility of the current governance arrangements with the increased transparency and accountability now routinely demanded of other central banks.
posted on 26 October 2007 by skirchner in Economics, Financial Markets
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Labor’s Tax Policy
Sinclair Davidson and Alex Robson on Labor’s tax policy:
Treasurer Peter Costello is correct when he claims there is a higher tax burden for some taxpayers under the ALP plan: all taxpayers earning between $37,000 and $102,000 will be worse off under Labor.
But the flip side is that some taxpayers will have a lower tax burden and be better off under Labor.
This can be confirmed simply by inspecting the table of figures released by the Treasurer on Sunday. After 2013, for example, those on incomes of $102,000 and above will be better off under Labor because they face lower marginal and average tax rates.
This part of Labor’s plan makes good economic sense. Nobel laureate James Mirrlees, who is leading a comprehensive review of tax policy in Britain, has shown that, even allowing for changes in income inequality, marginal tax rates should fall, not rise, as income increases. This is because the negative supply-side consequences of higher income taxes tend to swamp the inequality effects.
The most recent economic evidence from the US suggests higher income earners - those who will benefit most from Labor’s plan - tend to be the most responsive to changes in their taxable income. By flattening the tax structure, both tax plans move in the right direction.
posted on 26 October 2007 by skirchner in Economics, Financial Markets, Politics
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The Fed Moves Towards an Inflation Target
Ben Bernanke seems to be getting his way, with the Fed moving towards increased transparency, but the new measures will stop short of an explicit inflation target, according to the WSJ:
Federal Reserve officials are nearing consensus on several steps to make their deliberations more transparent to the public, but are likely to defer one of Chairman Ben Bernanke’s longstanding goals: an explicit inflation target.
The centerpiece of their new communications steps would be the release of economic forecasts of policy makers four times a year, instead of the current two times, with additional detail and background, according to people familiar with the matter. Moreover, the horizon for those forecasts would be extended to three years from two…
While the idea of setting an inflation target hasn’t been shelved, officials say it needs more discussion. Meanwhile, they see the longer forecast horizon as an interim step with many of the benefits of an inflation target. The public could assume the Fed expects to achieve its desired inflation rate in three years and thus a third-year forecast amounts to a target. The forecast approach sidesteps the biggest problems with an official number: the misgivings some officials still have with a target, potential political fallout and the difficulty of agreeing on the right number.
posted on 25 October 2007 by skirchner in Economics, Financial Markets
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Blame Martin Place II
I have an article in New Matilda on the implications of this week’s September quarter CPI outcome.
posted on 25 October 2007 by skirchner in Economics, Financial Markets, Politics
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Greenhouse Gas Abatement and Monetary Policy
The RBNZ is quite possibly the world’s first central bank to reference greenhouse gas abatement in explaining the current stance of monetary policy. According to today’s RBNZ intra-quarter policy review:
There are a number of other upside risks to inflation, including the direct effects of the proposed greenhouse emissions trading scheme and rising global food prices.
Greenhouse gas abatement is analogous to a negative short-run supply shock in its implications for monetary policy, except that it is self-imposed restriction on supply and therefore not strictly a shock. Couple this with the existing global demand shock emanating from the emerging market economies and monetary policymakers are increasingly going to have their work cut out for them.
posted on 25 October 2007 by skirchner in Economics, Financial Markets
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Blame Martin Place
Today’s Q3 CPI outcome cements the case for further RBA tightening at the November Board meeting. The government will inevitably cop a lot of flack as a result of the mid-election campaign tightening. For this, the government largely has itself to blame. Having taken credit for the cyclical downswing in interest rates in 2001, it can hardly avoid taking responsibility for the other side of the cycle. The irony is that the government’s campaign on interest rates in 2004 set it up to be a victim rather than a beneficiary of future prosperity.
This is unfortunate, since it distracts attention from the fact that it is the RBA that is ultimately responsible for interest rates and inflation outcomes. As then Deputy Governor Ian Macfarlane once said, ‘blame Martin Place.’ It is now clear that the RBA has fallen behind the curve in its task of inflation control. The RBA was already forecasting an increase in inflation for 2008 in its August Statement on Monetary Policy, even with the benefit of the August tightening. The baseline for the underlying inflation forecast in the November Statement will be 3.0%, based on the average of the statistical core series published today. Even with the benefit of a November tightening, it will now be difficult for the RBA to publish a target-consistent inflation forecast in the November Statement. The RBA really needs to raise rates by 50 bp in November, although will probably stick with 25 bp, with a follow-up 25 bp in December.
The smartest thing a new Labor Government could do would be to demand that Governor Stevens start giving press conferences after each monthly Board meeting. This would significantly change the media dynamics surrounding interest rate changes and make clear to the public who is really responsible for inflation control and changes in interest rates.
posted on 24 October 2007 by skirchner in Economics, Financial Markets, Politics
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