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Henry Thornton - Corporate: A discussion of economic, social and political issues From the coalface, Q4, 2010 Date 13/12/2010
Member rating 4.3/5
Treasurer outlines government's new banking laws.
By Henry Thornton and friends Email / Print

Swan introduces new banking laws, 13/12.

Treasurer Wayne Swan yesterday announced new banking laws to increase competition in the wake of the big four raising interest rates above the RBA level.

The Australian describes some of the new laws, 'The reforms will outlaw home loan exit fees from next July and give the competition watchdog the power to pursue banks engaged in price signalling. This involves banks tipping each other off about their intentions on rate movements. The plans, part of a three-tiered reform package released by the Treasurer yesterday, follow heavy criticism of the big four banks last month for raising their mortgage rates by more than Reserve Bank rate increases.

The proposals, which come ahead of a Senate committee hearing into the banking industry in Sydney today, sparked immediate controversy, with the Australian Bankers' Association defending exit fees as fair and hinting banks could cover their losses by increasing establishment fees.'

Henry's blog comments.  

More jobs growth, 'breathing space' on interest rates at risk, 9/12.

Here we go again, headless chooks drawing inferences from a single trend - although I do agree that jobs growth trend is one of the most reliable indicators of current and to some extend future growth.

'AUSTRALIAN employment surged in November, serving as a warning that the RBA may come off the sidelines earlier than expected in 2011.

'The unemployment fell to 5.2 per cent, as expected, from 5.4 per cent in October. The number of employed rose 54,600, more than double the average of economists’ forecasts of 19,100.

'The robust jobs report comes after the Reserve Bank of Australia was criticised for raising rates in November before the release of data showing a slowdown in economic growth.

' "We have taken the view that strength in the labour market is a more accurate guide to current conditions in the economy," Westpac analysts said in a report, adding that the annual jobs growth was the fastest since 2005.

'HSBC's Australian chief economist, Paul Bloxham, agreed: "In our view, the labour force survey is providing the clearest picture of what is happening in the Australian economy at the moment, much as it did three years ago when inflationary pressures were building".'

Growth below expectations = Monetary policy relief, 3/12.

In April of this year we pointed out that growth exceeding expectations equalled inflation to come.

Consistency requires that we allow for this theorum to act in reverse, despite our view that consistency is the sign of a middle class mind. While I would refuse to accept that description as a general proposition, perhaps even Henry may be permitted a middle class thought.

The September quarter national accounts showed GDP growth of a mere 0.2 %, or 2.8 % in the year to September quarter.

Real net national disposable income was up for the year to September by a whopping 7.6 % and in trend terms by 9.5 %.  The terms of trade were in the year to September quarter higher by an even more whopping 24 %.

Supporting information released today shows an unexpected fall in retail sales in October and a slight improvement in Australia's international trade data.

Comment in Henry's blog today. 

Mining boom hots up, 19/11.

Planned capital spending in Australia's minerals and energy sector - a highly reliable forward-looking economic indicator -  hit a record $132.9 billion, soaring 21 per cent in six months.

'The Australian Bureau of Agricultural and Resource Economics, a government research group, today said investments in the energy and iron ore sector were driving the increase, with energy projects accounting for 70 per cent of the total and iron ore making up a further 13 per cent.

'Booming demand for Australia’s mining and energy exports from Asian consumers has helped the country ride out the global financial crisis, but contributed to wage and inflation pressures that have seen the country’s central bank raise its policy interest rate by 1.5 percentage points over the past 13 months to 4.75 per cent.

'Development costs for major resource projects, particularly in Western Australia, are rising sharply as companies compete for labour and materials.

'The country’s Labour Price Index rose 3.4 per cent on the year in the third quarter, with the sharpest wage growth in the resource-rich states of Western Australia and Queensland'.

At the same time, RBA Deputy-governor Ric Battellino was in Perth pointing out that after 20 years of growth, the Australian economy was close to full capacity, the point at which inflation becomes a problem.

More here in Henry's blog

Jobs rise, but unemployment rises also, Que?, 11/11.

'THE unemployment rate rose unexpectedly in October, sending a strong signal to the RBA that it can keep interest rates on hold for now.

'Unemployment jumped to 5.4 per cent in October – its highest level since April -- from 5.1 per cent in September, data released today by the Australian Bureau of Statistics showed, despite the creation of another 29,700 jobs in the month.

'The apparent contradiction was caused by a swelling in the ranks of those seeking employment to record levels. The workforce participation rate surged to a record high 65.9 per cent in October, creating a surprise increase in spare capacity in the labour market, removing a key concern of the central bank'.

This has all the hallmarks of error-correction by the ABS.  I suspect the reality is that measures of those looking for a job have been understated, and October is the month chosen for a catch-up. (Henry remembers the month when a bundle of forms was discovered behind a filing cabinet - 'Don't let these facts get in the way of a good story' was the immediate conclusion, but fortunately no great harm was done.)

ANZ follows CBA rate rise,  11/11.

ANZ has followed the Commonwealth Bank and increased its lending interest rates above the RBA level.

The Australian reports the decision comes as the government moves to introduce new competition laws and populist anger at the banks continues to rise.

'ANZ raised its key mortgage rate by 39 basis points today to become the second bank to defy Treasurer Wayne Swan.

The bank, Australia’s third-largest, has announced its standard variable rate would move to 7.8 per cent.

ANZ has also revealed it will cut mortgage exit fees - the first bank in Australia to do so.

The decision comes more than a week after the Reserve Bank increased the official cash rate by 25 basis points to 4.75 per cent. The Commonwealth Bank, Australia’s largest bank, jacked its rates up by 45bp.'

Consumer confidence falls, 10/11.

'CONSUMER confidence plummeted 5.3 per cent this month after the central bank raised interest rates to their highest level since 2008.

'The Reserve Bank’s move to lift rates increased pressure on home-owners already struggling to keep up with mortgage payments.

'A closely watched survey by Westpac and Melbourne Institute, released today, showed that consumer confidence fell to 110.7 points in November in seasonally adjusted terms, from 117.0 points a month earlier.

'The drop in confidence comes as the RBA surprised financial markets last week by raising its interest rate 25 basis points to 4.75 per cent, which prompted the largest mortgage-lender, Commonwealth Bank, to hike its variable home-loan rate by 45bp'.

Interest rates creep into the tight zone as economy predicted to enter the red zone, 3/11.

Glenn Stevens declined the invitation to act preemptively against inflation with a 50 point increase in cash rates yesterday.

The Commonwealth Bank has done this job for him, and other banks can also be expected to raise their lending rates by more than the RBA's 25 basis point touch on the brakes.

Other responses were equally predictable; Aussie dollar touches parity with the US dollar (again); retailers warn of a tough Christmas - only 5 % annual growth, perhaps, rather than the preferable (for retailers) 8 %; and record gambling on a horse race in Marvellous Melbourne, the only Australian city where house prices are still rising.

Treasurer Wayne Swan, guzzumped by the opposition's shadow Treasurer, Smokin' Joe Hockey, has begun some bank bashing of his own and says he soon will have his own package of policies to create competition on the financial system.  None of Smokin' Joe's nine points have any merit, as the Treasurer said on ABC radio this morning, but he can be expected to use most of them anyway.

This writer cannot get his head around the fact that the RBA happily dropped cash rates in great 100 basis point chunks (after an initial super-cautious 25 basis point cut) during the Global Financial Crisis but cannot bring itself to hike in chunks of even half that size.  This shows there is an inflationary bias in even this, the 'miracle economy of the west'.

Meanwhile, in the mysterious East, China's central bank is worried about inflation, including the inflationary threat in the mighty USA, as three Wall Street journalists report via the Oz today.

More in Henry's blog today and in his regular advice to the board of the RBA, delivered yesterday.

Henry's crie de cour on modern management practices, 22/10.

Do not miss this splendid rant.

Rate hike on the cards, officials and 'independents' differ, 20/10.

It's official, Mike Stutchbury has said - 'Stronger dollar unlikely to stop RBA raising interest rates'.

This, of course, is based on the minutes of the Reserve Bank Board meeting of October 5, which you may read for yourself here.

Stronger growth in China, weaker in Japan and the USA, uncertainties in Europe, all 'broadly in line with expectations'.

Since the board last met, China's second quarter growth is estimated to be stronger than expected, at an annual rate of 10.3 %, with rising inflation, prompting a China rate hike, but no doubt this too is 'broadly in line with expectations'.

Domestically, not much news, except for strong - [radioactively strong I'd say] - employment data but this also was 'broadly as expected'.

'A case could be made [and I bet it was, by RBA officials] to increase the cash rate at the current meeting, based on the medium-term inflation outlook and the fact that developments had continued to be broadly consistent with the central forecast scenario. The case to wait before making a tightening move [and I bet it was, especially by the Treasury Secretary and the odd 'independent' who happened to make it that day] was that the economy was still expected to continue growing at trend in the near term, credit growth had softened somewhat and the rise in the exchange rate would, if it continued, effectively be tightening financial conditions at the margin. Moreover, it was still possible that downside risks to global growth could materialise'.

'Members felt that these arguments were finely balanced. While the Board recognised [the staff's view] that it could not wait indefinitely to see whether risks materialised, [Treasury and private sector] members judged that they had the flexibility to do so on this occasion. Overall, they concluded that it would be appropriate to hold the cash rate steady for the time being, pending evaluation of further information at the next meeting.

Henry's blog today provides additional entertainment, for those who believe official commentary is mostly a bit amusing.

Leading indicators strengthen, 12/10.

'BUSINESS conditions improved in September despite a dip in confidence, as forward orders signalled strength, according to a NAB survey.

'The economy continued to exhibit a two-speed pattern, with conditions for mining and transport outstripping retail and manufacturing,

'But in a sign of strength, forward orders for business lifted strongly in September, sweeping away an area of deep concern among economists, with some saying the weak pipeline was one consideration behind the Reserve Bank of Australia's decision to keep interest rates on hold in October.

'The National Australia Bank's business confidence index fell 1 point to plus 10 in September, while the business conditions index rose 2 points to plus 7 points.

'The forward orders index surged by 9 points to a reading of plus 3 in September, while capacity utilisation nudged higher to 81.6 per cent from 81.2 per cent.

"Forward orders, stocks and capacity utilisation all improved, suggesting that the economy may be starting to emerge from the weakness in the early part of the September quarter," NAB said.

One million Australians sign up for QR National offer, 10/10.

More than one million Australians have signed up for the QR National share issue.

SBS reports there is great interest in the Queensland government's decision to privatize the state owned train freight company.

'More than a million people have pre-registered interest in buying shares of Queensland's freight rail business.

QR National is being sold off by the government in what is expected to be one of the biggest market offerings in recent years.

The company will be floated before the end of the year.

Pre-registration for mum-and-dad investors closed on Friday and an offer price is due to be announced on Sunday morning.

Figures released by the government show 257,000 investors pre-registered before Friday's deadline, alongside 780,000 people through brokers.'Coffee prices rocket in mining states, 9/10

Finally, a serious contribution on Australia's two-speed economy, by Paul Cleary. (Believe me, no sarcasm is intended by this opening - Cleary is performing highly relevant work at the coalface. Great photo in the hard copy version of the paper, incidentally.)

'WEST Australians have always felt removed from the rest of the country, but now the prices they pay for coffee put them a world away.

'An espresso coffee in booming Perth now costs about $4 or even as much as $4.50, which is up to 50 per cent higher than the same coffee served in slow-lane places such as Sydney and Melbourne.

'Coffee prices in Brisbane, the capital city of the country's other state benefiting from a resources boom, are also considerably higher at about $3.70'.

Aussie dollar rockets toward parity, 9/10

Also recommended today is Michael Stutchbury on the rocketing Aussie dollar, which brought back such sweet memories, revealed below.

Henry's blog from 21 September weighs in. 

Titans of business 'intimidated by Labor govt, 9/10.

The week has seen a fair bit of complaint about the Labor government's intimidatory behaviour toward captains of industry.

Poor fellows, still they do get a lot of danger money as CEOs.

Here is a personal account - a Labor Treasurer abusing a (poorly paid) central banker, back in 1986.

'After about 6 months of debate within the Bank I gained permission to publish a table showing the growth [of Australia's international debt], which is still modest, ... The table attracts mild interest, but a fuse has been laid and the economy sees that it is alight. My brooding intensifies. I decide to do something completely outside the usual frame, to construct some 5-year forecasts. Existing models, even the RB II model, is inadequate for the task but an inventive team, which includes as key members Chris Ryan, Jeff Carmichael and Malcolm Edey do the necessary technical work with flair and authority. We feed reasonable projection for external growth, for commodity prices and world interest rates and run the simulation. Lo and behold, the model predicts an explosion of debt, a massive fall in the value of the Australian dollar, the resurgence of inflation and another large rise in the rate of unemployment! My fellow members of the policy committee of the Reserve are not amused. 'Deliberate pessimism' is the cry, and another 6-month debate began.

'Eventually it was agreed to send our controversial projections to the Treasurer, carefully marked 'Draft' with a covering letter which fell well short of endorsement. In short order we are summoned to Canberra where, as the poet wrote, 'All hell broke out'. We met in a large meeting room in Treasury. The Treasury team sits opposite the Bank team and its members are careful to avoid eye contact. The Bank team sits with me on the other side of the table, but seemed to be leaning away from me in both directions. The Treasurer is at the head of the table with his advisers and is obviously pretty steamed up. He has extensively annotated the paper and quickly launches into a tirade of abuse mixed with analysis. 'Deliberately pessimistic' is the core of his criticism, though some of the abuse would have been fun to listen to if I hadn't been the chief beneficiary. We debate the paper for several hours, and I gradually score points. Jeff Carmichael also fights hard for the Research department case, and towards the end Euwan Waterman says from the far end of the Treasury bench that it is possible that I had a point.

'Bernie Fraser at that stage risked some eye contact, and the rest of the Reserve's team sat slightly more vertically, though I can recall no positive leaning in my direction. A week or so later the Commonwealth Statistician struck a blow for our cause, when he released a record current account deficit of $1.3Bn. 'Don't gloat' was Bob Johnston's advice as we went back to see a more subdued Treasurer. Some little time later Paul Keating made his famous 'banana republic' comment on the John Laws show and set the stage for some serious policy action. The excessive budget deficit was turned into a surplus and the ACTU copped another cut in real wages. These were the main policy recommendations in our paper for the Treasurer, which he initially described as 'impossible.' The Bank's own policy contribution was a judicious touch on the monetary brakes, and this set of actions added up to one of the most successful bits of economic policy action yet seen in Australia's economic history.

'In the wake of this episode I was systematically cut out of the policy loop, a response that puzzled me at the time. But in thinking about his time in government, I have sometimes wondered if there is not a revealing pattern. Paul Keating started out with a number of competent and courageous policy advisers but these gradually dropped away. I wonder at the causes of this, and whether they do not point to some curious quirk in the Keating psyche, amounting, perhaps, to a fatal flaw'.

I am pleased to say I was abused, my career as a central banker was ended abruptly but I was not, repeat not, intimidated.  Big boys don't cry, titans of business.

Two questions are raised for young RBAers, even (or perhaps, especially) at the Malcoln Edey level: be careful how much courage you bring to your work; and will you be supported by your bosses if you overrstep the mark?

Labor market continues strong growth, 7/10

We learned overnight why the RBA, after prepping us for rate hikes, has paused in its plan to bring monetary policy into the 'tight zone'.

With 50,000 new jobs in Australia, it may be that the Reserve was head-faked by the professional 'no-rate-hikers' - retailers, real estate agents and others who would like the economy to be in a state of perpetual boom.  Today's jobs result certainly eliminates the sky is falling pessimism that was around before the RBA board had downed the first oysters at lunch on Tuesday.

I suspect the real reason the RBA held its rate hike was because the International Monetary Fund (IMF) has gotten nervous about the global recovery.

More here in Henry's Blog today. 

Rate hike - pros and cons, 5/10.

The case for monetary policy tightening is that Australia is experiencing a renewed China boom, households are spending up on new cars, overseas holidays and restaurent meals and wasteful government stimulus limps on.

The case against is that the monthly inflation in September guage showed only a small (0.1 % rise), retailers fear the consequences, credit growth is low and real estate agents (and house price data) say the property boom may have flattened out.

David Uren and Jennifer Hewett make the case for holding rather than hiking today.

More here in Henry's blog today

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