...confirmation to that his next move in interest rates will most likely be down.
And much much more. The whole transcript of Friday's parliamentary hearing is worth reading.
Some highlights:
ON RATES:
“The current level of rates, as we have made quite clear, is on the high side. When they’ve done the job, they can come down.”
ON UNEMPLOYMENT:
“In principle it could hardly rise at all. But if we are honest I think we have got to accept that through periods of history the unemployment rate goes up a bit for a while and then it starts to go down again.”
ON REPOSESSIONS:
“I wouldn’t use the term collateral damage, but people are affected by higher interest rates. I know that. I don’t have an instrument that only affects some people and not others.”
ON HOUSING STRESS:
“There has been a trend for the community as a whole to become more affluent. That has led to a choice by many people to put more of their income into housing. That isn’t stress, that’s a choice.”
ON THE BANKS:
“We don’t want a world where banks can not make an adequate return on their lending, and stop doing it. That I can assure you is a far worse world than the one we currently inhabit.”
ON EMISSIONS TRADING:
“It will mean a reduction in our living standards insofar as our purchasing power over energy-intensive things is concerned. We’ve got to accept that.”
ON TAX CUTS:
“In an economy like ours where we’ve got no debt, the budget is in surplus - it is continually in surplus it seems to me there is an obvious structural case that can be made for lower taxes.”
ON THE US ECONOMY:
“It is certainly feeling like a recession, even if it isn’t one. That’s what we’ve been assuming for a little while now.”
Stories below:
The Reserve Bank Governor has signaled that his program of rate rises is over at the same time as Australia’s largest bank, the Commonwealth has leapfrogged its competitors to push up its mortgage rate by a further 0.12 points to 9.44 per cent.
The new standard variable mortgage rate puts the Commonwealth ahead of the ANZ, Westpac and the National Australia Bank which charge 9.37 and 9.36 per cent.
Only St George among the big banks charges more at 9.47 per cent.
Appearing before the Parliament’s Economics Committee in Sydney yesterday the Reserve Bank Governor Glenn Stevens defended the actions of the saying that their costs had increased by more than the Reserve Bank’s cash rate.
“Like any business they are seeking to cover the cost of their funds,” he said.
“There are a lot of other banks around the world that are baring very large losses and are struggling to replenish their capital and so are not in a position to do much lending. If you are to ask me which of those scenarios I think is preferable, I would say it is the one we’ve got, for all the presentational issues that it gives us.”
The Governor said his board had taken into account the likelihood that the banks would impose their own rate rises in making its recent decisions and was hopeful it would not need to push up its own rates again.
“We couldn’t know precisely how much more than the cash rate rise their rates would go up by but it was obvious there would be some effect, and we’ve been calibrating for that all the way through in what we do.”
The Governor’s remarks were underscored by retail figures released while he was speaking showing that consumer spending fell for the second successive month in February, falling by 0.1 per cent after a 0.1 per cent fall in January.
The annualised trend growth rate is now just 2.3 per cent, well down from 9.8 per cent six months ago.
Discretionary spending was the hardest hit, with expenditure on household goods diving and restaurant and liquor spending recording the weakest results for 29 months and 6 years.
Westpac’s economist Matthew Hassan said consumers were “clearly reining in expenditure”.
“One month does not make a trend. Two is a different story,” he said.
The Australian dollar slid by more than one quarter of a cent to 91.23 US cents as traders become convinced that the Reserve Bank would not be increasing its rates again.
The Reserve Bank Governor said he couldn’t say at what point rates might come down.
“I can’t even promise, really, that they might not rise again. What I can say is that I think the current level of rates is on the high side - at some point in time they can be lower.”
Australia’s inflation rate, due for release in a fortnight’s time is thought to be 4 per cent. But the Governor said he would not need to wait for it to come back to within his 2 to 3 per cent target band before cutting rates.
“We don’t wait until to the point where inflation has actually gone all the way back down to the target. What we are trying to do is to get to the point where we are fairly comfortable that that is going to occur and then we can start the adjustments.
The Opposition Treasury spokesman Malcolm Turnbull seized on the Governor’s optimism about inflation to assert that he had made it “very, very clear that inflation is not out of control, it's under control.”
“It is reassuring because it offsets the language used by the Treasurer."
And more:
Australia’s number one banker has good news, but little sympathy for Australians struggling under the weight of the worst mortgage rates in 12 years.
Over three hours on Friday the Reserve Bank’s Governor Glenn Stevens made it clear to the Parliament’s Economics Committee that the interest rates he controlled would rise no further.
But he said that many of the Australians complaining about high mortgage rates had brought their troubles on themselves.
Why were are our mortgages so high? The Governor said it was because we had chosen to live in better houses.
“I think there has also been a trend for the community as a whole to become more affluent and with that has come, in large chunks of the middle classes, a decision to spend a higher proportion of income on housing, just as they now have to spend a lower proportion on some other things like manufactured goods whose prices have fallen or food.”
“As you get more affluent some of the necessities take up a smaller proportion of income and some of the things you really want take up a larger. That I think has led to a choice by many people to put more of their income into housing. That isn’t stress, that’s a choice,” Mr Stevens said.
The Governor said he gets upset when he reads about mortgage stress, because he thinks the term is too loosely defined.
“I have seen references to people being in stress if they spend more than 30 per cent of their income on housing. But the original definition was narrower than that. It was if you were in the bottom 40 per cent of the income distribution and you spent more than 30 per cent.”
“I mean someone on a very high income who has chosen to have a very large mortgage and still has a lot of money to live on after that, they could technically be defined as in stress if you used the 30 per cent rule, so I don’t think that’s very useful.”
He was in no doubt that some Australians were feeling pain. But there were only 15,000 people across the whole of the country who were running 90 days overdue on their loans. The figure was coming down.
“I am aware of those problems, and we certainly are conscious of the need not to inflict any more pain on those people than is absolutely necessary, but in the end we have to make and aggregate decision for the economy as a whole. I wouldn’t use the term collateral damage, but I do not have an instrument that would only affect some people and not others, and neither does anybody else.”
The whole point of what the 12 successive rate rises engineered by the bank over the last six years has been to slow our spending. In order to do that they will probably push up unemployment.
“What is clear is that 5 per cent plus demand growth can’t be sustained. It has to slow down. Employment growth will slow as well. The extent to which unemployment would rise depends on a range of other factors not least of which is how flexibly and quickly the labour market responds to the slower growth in output.”
“If we are honest I think we’ve got to accept that through periods of history where you have a mid-cycle pause in the growth trend, which is what we’re talking about here, the unemployment rate goes up a bit for a while and then it starts to go down again.”
“I don’t think there’s any sense in which one should say a much higher rate of unemployment would permanently be needed to contain inflation. But that isn’t to say that there can’t be some temporary rise for a while.”
Governor Stevens believes that he has probably pushed up rates enough to reign in inflation. “I can’t tell you at what point rates can start to come down. I can’t even promise, really, that they might not rise again,” he told the committee.
“What I can say is that I think the current level of rates, as we have made quite clear, is on the high side. “
“At some point in time they can be lower. When they’ve done the job, they can come down.”
He thinks they might be doing the job right now, even if our rate of inflation continues to stay high at 4 per cent, well above the Reserve Bank’s target of 2 to 3 per cent.
He stressed that he didn’t need to wait until inflation actually fell to 3 per cent before easing rates.
“What we are trying to do is to get to the point where we are fairly comfortable that’s going to occur and then we can start the adjustments occurring.”
Asked when that would be the Governor replied, “I can’t tell you that at the moment, mainly because I don’t know, although it probably would not be appropriate to foreshadow anyway, but I don’t know the answer at the moment.”
While the Governor was speaking about taking his foot off the interest rate pedal elsewhere in Sydney the Commonwealth Bank, on some measures Australia’s biggest, was pushing up its mortgage rate to 9.44 per cent, higher than that of its three biggest rivals.
Mr Stevens was empathetic.
“Banks are very profitable. That’s true. But at present what’s happening is that their cost of funds is increasing by more than our cash rate. That’s a fact, and like any business they are seeking to cover that cost of funds in the price of their product.”
“While I know that people feel perhaps aggrieved that banks are highly profitable, there are a lot of other banks around the world right now that are bearing very large losses, and are struggling to replenish their capital and because of that they are not in a position to do much lending. So if you are to ask me which of those scenarios I think is preferable, I think it is the one we’ve got, for all the presentational issues that it gives us.”
”The economy would be much worse off were it otherwise,” the Governor said.
He had also been allowing the banks to do some of his dirty work for him.
The Governor confirmed to the committee that were it not for the private banks widening their margins, he would have lifted the Reserve Bank’s rates by more.
“We were taking account of their actions in setting the rate that we set. We couldn’t know precisely how much more than the cash rate their rates would go up by, but it was obvious there would be some effect, and we have been calibrating for that all the way through in what we do.”
Should banks be more tightly regulated as to what they can charge?
“I am older to remember a much earlier time when bank interest rates were regulated quite heavily, and they couldn’t lift loan rates which meant they couldn’t raise the funds to profitably lend, which meant they didn’t lend.”
“When conditions tightened you didn’t just get a graduated response of lending slowing down, the tap got turned off,” Mr Stevens said.
For now the Governor is happy for the government to present a tight budget and reign in spending. He said in the fight against inflation, “every little bit helps”.
But not further down the track. In a surprise for Australians who might regard him as a killjoy the governor supported the case for big tax cuts, when Australia’s present inflationary problems were out of the way.
“In an economy like ours where we have no debt, the budget is in surplus – it is continually in surplus - it seems to me there is an obvious structural case that can be made for lower taxes,” he said.
“At the same time in the current environment there is an obvious cyclical case for tighter fiscal policy, just for the moment, in order to take the pressure off demand in the economy. That’s actually been the case for several years now. So you’ve got a structural case for lower taxes, and a cyclical case not to, or even for higher taxes if you are really serious.”
“That’s not an easy judgment to make. It’s hard strike the balance,” the Governor said.
After containing inflation he said his next big challenge would be the government’s emissions trading scheme. Like the introduction of the GST did, it would boost prices. But with deft handling, not inflation.
“The GST was a one-time price shift, it wasn’t an ongoing inflationary effect provided there were no second rounds.”
“We won’t rush in and bang the economy on the head the moment there is a rise in relative energy costs. We will take a medium term view.”
“The community will have to accept is that this is a reduction in living standards insofar as our purchasing power over energy intensive things is concerned and not collectively push up wages to get it back.”
