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Sage turns brickbats into building blocks

Glenn Stevens has copped some flak in recent months. He didn't move quickly enough on interest rates in the early part of the year. He panicked and shouldn't have cut rates as hard and fast as he did mid-year. He should have raised rates rather than cut.

Glenn Stevens has copped some flak in recent months. He didn't move quickly enough on interest rates in the early part of the year. He panicked and shouldn't have cut rates as hard and fast as he did mid-year. He should have raised rates rather than cut.

After years of bouquets, 2012 has been the year of the brickbat for a battle-hardened Stevens.

Each month, warring economists have fought over the appropriateness of settings in a nation divided by the uneven spread of wealth flowing into the economy and weighed down by an overwhelming sense of dread that another global meltdown is just around the corner.

But after yesterday's inflation figures, the Reserve Bank governor has emerged with reputation firmly intact. Despite an economy growing at a healthy pace and with unemployment at historically low levels, inflation has plumbed its lowest level in 13 years.

On an annual basis, inflation has come at the very bottom of the Reserve Bank's comfort zone of between 2 and 3 per cent.

For the eternal worriers, yesterday's number is likely to spell impending doom as, under normal circumstances, inflation at such low levels could be interpreted as evidence of a rapidly cooling economy.

You can expect housing and retail industry lobby groups to turn up the heat, arguing for even more interest rate cuts to kick demand along. Don't count on them having any real success. The only event that will spur our central bank into cutting rates will be a serious deterioration in Europe. More on that later.

But it would appear the Reserve Bank once again has properly anticipated the forces shaping our economy. For if you sift through yesterday's statistics there is ample evidence the hefty interest rate cuts of recent months effectively three cuts in three months are already starting to work their magic.

Housing prices appear to have bottomed and building approvals have begun to lift. After years in the doldrums, there's even been some improvement in business lending.

In fact, National Australia Bank yesterday decided to take advantage of the improved demand from businesses by pushing through an interest rate hike on some of its business loans, citing the tired old excuse normally reserved for housing mortgages higher funding costs.

But that's another story. Just as national economic growth is spread unevenly across the nation, it is a mistake to believe that inflation is some kind of all-encompassing uniform figure. It is a rounded out average of 87 components that often hide all manner of sometimes diametrically opposing trends.

For the past few years, the strength of the Aussie dollar has kept the headline figure down. The price of imported goods has crashed. Anyone who has walked into an electronics retailer in the past two years would be stunned by the speed and degree of the price falls the combined impact of the currency factor and the online revolution in retail.

Countering that at times have been sharp rises in various foodstuffs, often resulting from the violent weather that has swept parts of the nation, particularly the east coast.

But as Stevens warned in a recent speech, the dollar effect will soon begin to wear off. The rise in the dollar has pushed imported prices lower. But now that the currency has stabilised around parity with the American dollar, the impact on inflation will wane.

That is already becoming evident. Yesterday's inflation figures showed tradeables that's economic speak for imports prices decreased by 0.2 per cent. So the dollar effect is still there.

But the numbers also showed domestic influenced goods and services price rises slowing, a fact that HSBC economist Paul Bloxham says points to improved productivity, the supposed Achilles heel of the Australian economy.

The introduction of the carbon tax on July 1 will begin to course through the economy and undoubtedly will boost inflation in the next quarter. But its impact is likely to be a one-off event and, as such, will not figure greatly in the central bank's policy settings.

Given such a rosy domestic performance, there would appear to be almost no reason for the Reserve Bank to again cut rates this year, despite the pain being felt in the eastern states.

Unfortunately, the perpetually fragile mood among domestic consumers and businesses and the overwhelming negativity surrounding global markets continues to overshadow our domestic performance.

The benign inflation numbers yesterday did little to boost confidence on the stockmarket. Another savage session on Wall Street overnight, the third in succession, sent stocks tumbling in early trade, although the mood improved in the afternoon.

After more than 18 months of fires erupting in outlying areas such as Greece, Europe's debt crisis has begun to rapidly move towards the centre.

Spain, which did not suffer from the same profligacy as Greece and Portugal, is now facing economic collapse after its property bubble burst. Its banks have been bailed out. But that has proved insufficient. Unlike Greece, which already is re-entering the financial danger zone, Europe cannot afford for Spain to default.

The debt crisis has also begun to weigh on Germany, with indications this week that its manufacturing and export performance has weakened.

Having cut rates to historically low levels, Stevens will be mindful of keeping as much ammunition in reserve as possible. Further interest rate cuts are likely, later this year. But from now on, the rate cut has been confined to the glass case with the big red letters emblazoned across it: EMERGENCY USE ONLY.

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