RBA’s Stevens sur­prises mar­kets with in­ac­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

When Glenn Stevens, Re­serve Bank of Australia Gover­nor, pre­sented his poli­cies on Tues­day, he was faced with an im­pos­si­ble co­nun­drum: to hike in­ter­est rates or to cut them? Both op­tions would have both pos­i­tive and neg­a­tives con­se­quences on dif­fer­ent sec­tors of the coun­try’s dis­parate econ­omy. So what did Stevens do? He sur­prised the mar­kets and chose nei­ther.

The Aus­tralian econ­omy is faced with an in­ter­est­ing two-pronged re­al­ity at present. On the one hand, the econ­omy grew just 2.5% in the last quar­ter of 2014 from the year be­fore, the slow­est growth rate of the year. The coun­try now faces the high­est un­em­ploy­ment rate in over 12 years, and the av­er­age salary has dropped down from $73,000 to $62,000 in the last two years. Many an­tic­i­pated that as a re­sult Stevens would an­nounce plan to in­tro­duce fur­ther stim­u­lus and cut bor­row­ing costs.

On the other hand though, Australia’s hous­ing mar­ket is surg­ing out of con­trol. The re­source-rich west­ern re­gions of the coun­try have ben­e­fited from the Chi­nese ap­petite for coal and iron ore, lead­ing to high salaries and home prices, while rich Chi­nese buy­ers who see the ap­peal of for­eign homes have con­trib­uted to the es­ca­lat­ing prices in big cities. Land prices jumped over 500% faster than in­fla­tion in Syd­ney and over 1000% faster in Perth be­tween 2001 and 2011, and are still on the rise to­day. Steven’s de­ci­sion to do noth­ing at present re­flects the fact that while many in­di­vid­u­als are strug­gling to pay the rent, if he takes ac­tion to help them and re­vive the econ­omy, he could risk fu­elling the ex­plod­ing prop­erty bub­ble.

As a re­sult, even if he does plan on stim­u­lus in the long-run, he prefers to first wait and see if the econ­omy can nat­u­rally ad­just it­self to other fun­da­men­tal fac­tors. His speech came soon af­ter the strong US em­ploy­ment fig­ures last week, which bode well for the US dollar and caused the price of com­modi­ties to fall, in­clud­ing oil, gold and iron ore. Although iron ore is Australia’s big­gest ex­port, the drop in price could put pres­sure on the Aus­tralian dollar and help to make all of the coun­try’s ex­ports more com­pet­i­tive.

Stevens’ un­ex­pected in­ac­tion may also serve as a sub­tle warn­ing to the Prime Min­is­ter, Tony Ab­bott. The Gover­nor knows that the Cen­tral Bank can­not and should not work in iso­la­tion from the gov­ern­ment. Ab­bott too must take re­spon­si­bil­ity and must de­liver re­form in or­der for rate changes to be ef­fec­tive. In the 17 months since his elec­tion, Ab­bott has fo­cused on cut­ting the na­tional bud­get at the ex­pense of di­ver­si­fy­ing Australia’s econ­omy and dis­tribut­ing its wealth. That should be his top pri­or­ity right now.

He needs to in­vest in the right ed­u­ca­tion and in­fra­struc­tures to en­sure his coun­try’s global com­pet­i­tive­ness and fu­ture growth. He needs to en­cour­age the ex­ist­ing tourism and trade sec­tors to ex­pand and thrive. He needs to cre­ate well-pay­ing jobs in science, tech­nol­ogy, and man­u­fac­tur­ing.

While Glenn Stevens’ de­ci­sion to leave in­ter­est rates at a record low of 2.25% may have star­tled the mar­ket, we can be sure that it wasn’t an in­do­lent de­ci­sion. He likely still stands by his known stance that Aus­tralian tourism and ex­ports will ben­e­fit from a lower val­ued cur­rency, and may very well cut in­ter­est rates in the next few months.

His re­fusal to act should there­fore be seen as part of a care­fully cal­cu­lated long-term plan. Stevens is con­scious of the two-tiered econ­omy and knows that his poli­cies will work best with Ab­bott on board and with the right tim­ing of other eco­nomic fac­tors. He’s not ready to change the sta­tus quo just yet.

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