Economist criticises rate targeting

[Kennethkohsg]

Hi Kenneth,

Yes, I read that too, but I still believe that we need to keep the inflation genie in the bottle and not go easy on rates to protect the economy in the short term. If you do that then you just create a bigger problem / recession in the medium term.

Here's an excellent article by Dr Shane Oliver on the risks of moving the RBA's inflation rate targets:

http://library.corporate-ir.net/library/21/219/219073/items/295520/OI270508.pdf
Cheers,
Michael

***********************
Dear Michael,

1. While I do agree with your concerns to a certain extent, however, I still personally believe that the real solution actually lies with the RBA to accurately assess the emerging inflation picture accurately and to properly and skilfully "re-balance" the Australian Economy where neccessary, please.

2. Given the different risk levels/scenarios, whether the present RBA under Glenn Stevens's leadership is indeed able to subsequently make such accurate judgement call and to safely and skilfully "re-balance" the Australian Economy into a soft landing by slowing it down presently, is left very much to be seen in due course.

3. To me, this is more an "Art", rather than a precise Science per se, which is highly dependant of the RBA's own accurate and sharp judgement calls on the fast-changing, dynamic market situation as well as its level of experience/skills level to pro-actively and properly fine-tune its own IR policy where neccessary in a timely manner, in order to properly slow down the Australian Economy effectively for a soft landing, without stalling it into an official Recession subsequently nor allowing the present high inflation from being permenantly entrenched into the Australian Economy.

4. This is no simple challenge/task for the RBA indeed.

5. For your further comments and discussion, please.

6. Thank you.

Cheers,
Kenneth KOH

 

[lizzie]

Food and services prices form the majority. These prices are domestically driven.

but a large percentage of this "food and services" price rise can be traced back to the increase in price of petrol (which is externally driven) ... bit of a broken record.

 

[TheAnalyst]

I do not think Rate will rise twice this year

1. I do not believe rate will rise twice this year by RBA as suggested by a number of bank economists.
2. FUELwatch must not be introduced. It is a stupid idea and anti-competitive. Fuel levey must be relexed.
3. Government MUST take a hardline on oil companies from profitrating. They must adopt some kind of capping measures or others to curb these oil companies. Why Woolworth can give a 10C discount when you go their stations while they already make a lot of money from their retailing business --- the only answer is they put up the price.
4. ACCC is a paper tiger. We have seen a number of reviews on petrol and retail ---- apart from the waste of money, nobody gains anything.
5. Rudd to show himself less and focus on real thing. Otherwise, either he maybe replaced by Julia soon or he loses early election next year. From his debate in the parliament, he has no credibility at all. His debate is so poor. I believe he has no interest in understanding real thing.
6. The govenment must be GOVERNING, even they might have to introduce some red tapes on big businesses. The banks, the oil companies, the retailing giants they all work against the government.

 

[boomtown]

Michael

I think the analyst you linked only looking at one side of the equation. A 10%drop in the price of housing would drive my gross yields to 7% on the date of purchase.

To say that would be a disaster for investors isnt quite right. It would be rather handy.

 

[npb555]

Continuing to raise interest rates when the cause of inflation is demand for inelastic products whose demand will remain constant no matter what price is charged will lead to serious economic damage.

I speak to many on small businesses (service and retail) and I can tell you most are already doing it very tough since the end of last year when official and unofficial rate increases really started biting. Just anecdotally, my local shopping centre in Robina looks to have around 20-30% less foot traffic when I shop on the weekend, whilst retail vacancies are everywhere in Surfers where I work and at 2 new strip centres (both open nearly 12 months) down the road from where I live.

Economists need to have serious think about what outcomes will be achieved by continuing to raise rates when consumer demand and confidence has decreased markedly already. Sadly, economists don't see the real world like us, its all theory to them and most get their forecasts totally wrong, so the medicine is often worse than the disease.

 

[Francesco]

Continuing to raise interest rates when the cause of inflation is demand for inelastic products whose demand will remain constant no matter what price is charged will lead to serious economic damage.

I speak to many on small businesses (service and retail) and I can tell you most are already doing it very tough since the end of last year when official and unofficial rate increases really started biting. Just anecdotally, my local shopping centre in Robina looks to have around 20-30% less foot traffic when I shop on the weekend, whilst retail vacancies are everywhere in Surfers where I work and at 2 new strip centres (both open nearly 12 months) down the road from where I live.

Economists need to have serious think about what outcomes will be achieved by continuing to raise rates when consumer demand and confidence has decreased markedly already. Sadly, economists don't see the real world like us, its all theory to them and most get their forecasts totally wrong, so the medicine is often worse than the disease.

I would not be so tough on my tenants if IR were not increased so much within a short period. Out of about 1.5% IR increases I managed to pass 1% IR cost to tenants. If they were to leave I will probably manage to pass all IR increases to new tenants and that is what RBA wants isn't it - to ensure a global impact to bear down on consumption and CPI. In my household expenses are looked at more keenly especially with the losses suffered in the ASX.

Anyway my local Bunnings store is beginning to have less customer cars in the carpark in the weekend. It seems to me IR increase and increased dollar strength has produced more sales of white goods, TVs (discretionary) and now in the renovations sector. Petrol cost already has hit people's wallets and now IR comes along and squeeze people's wallet when consumption is already down. RBA will reduce the money supply and small businesses will be hit. It seems to me what the reduced tax rate gives back to employees who rent the rental increase will collect to pass to lenders to pass ultimately to RBA.

The low target band needs to be revisited. B Fraser is missed.

 

[landlubber]

10. The RBA's target - since enshrined in formal agreements between the RBA governor and the treasurer - is to keep consumer price inflation "between two and three per cent, on average, over the cycle''.

This "enshrined" point is a huge "red flag" to me. Ina world where "everything" changes and has "cycles" , prices change for "everything" from commodites to services, China comes along and drives demand "through the roof" etc ... why the heck would you "enshrine" ONE PARAMETER, JUST ONE in the economic tool-box ( inflation ) and "set it in concrete" ? Not only does it fly in the face of all logic, it totally defies belief. And these guys reckon they know what they're doing . "Bah humbug" I say .
LL

 

[boomtown]

I think you will find that the vast majority of people in positions of great responsibility really do have no idea what they are doing - they just bumble along the best they can on the basis of the information that they have before them.

Im sure at the time it seemed like a pretty good idea and despite what comes through to the press - there is little doubt in my mind that the RBA governor is losing sleep atm. We have already had an example (I think it was early last year) where the governor declined to raise rates when they probably should have gone up due to sensitivity to the general population.

 

[alexlee]

They're using inflation targetting as the main policy because that's what worked the last time. Call it the Volker effect. Unfortunately, it's also the most justifiable thing that they can do. Sure they can go invent something else, but if it fails they get blamed. If they just follow what was done, and more importantly worked before, they can justify failure.

Having said that, I don't think we should increase the inflation band just because it's due to increased oil prices. If oil is more expensive, we should use less of it. If that requires a recession, so be it.
Alex

 

[Francesco]

Having said that, I don't think we should increase the inflation band just because it's due to increased oil prices. If oil is more expensive, we should use less of it. If that requires a recession, so be it.
Alex

Ah, Eureka, reduce usage of oil not IR!

 

[dave99]

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Dear Dave99,

1. On the basis of your abovementioned post, are you then suggesting that RBA has still not sufficiently slowed down the Australian Economy, with all its recent interest rate increases, at this point in time?
...
5. I further believe that for RBA to "pre-emptively" increase the interest rate unilaterally again at this point in time, without waiting for a clearer overall macro economic picture to develop in due course, is likely to further increase the existing risks unneccessarily of "stalling" the Australian Economy down into an official Recession

Hi Ken,

I completely agree with you. I think there is ample evidence that the economy is sharply slowing, and further interest rate rises are not required. The 4% inflation we are seeing is lagged I believe 6-9 months, and will surely fall over the next 12 months. I believe GDP will probably also fall to 1.5-2%, this is the short-term cost the Reserve Bank has imposed of avoiding a full blown recession.

 

[dave99]

Food and services also involve transport
and the cost of transport is going up due to the higher fuel prices.

but a large percentage of this "food and services" price rise can be traced back to the increase in price of petrol (which is externally driven)

Hi BV, lizzie,

I totally agree that a portion of the cost is transport.

But I disagree that it's a large percentage. I think the vast majority of the cost is not in transport - it's in the production of the raw ingredients, and the processing (machines and labour) either in factories or at restaurants.

I believe the inflation we've seen is mainly due to big spending from sharply increased incomes for people in occupations who have benefited from the commodity boom. On average, disposable incomes went up 8% in 2007 in Australia. That's huge.

I know that petrol has gone up a lot - but the fact that we see the prices on big boards every day brings it to the front of our minds. Many occupation's incomes (not all) also went up dramatically over 2005 - 2007 and had a big effect on inflation. But incomes are not visible like petrol prices and don't get any press.

 

[boomtown]

I think a significant portion of processing and production costs are also fuel. You need to run the tractors and the aerial sprayers and the harvesters etc.
Topcropper would be able to comment on that.