RBA clarifies GST influence on
policy
Source: AAP | Published: Friday May 5, 12:05 PM
The Reserve Bank of Australia's Semi-Annual
Statement on Monetary Policy today was a more
complete explanation of the central bank's views on
monetary policy than the statement announcing the
interest rate hike two days earlier.
This was not just a matter of size - today's
Statement was 49 pages, including charts, while
Wednesday's effort barely covered both sides of an
A4 sheet.
What Wednesday's announcement - and its
predecessor - lacked was an acknowledgment that
the tax package had bearing on the Bank's policy
stance and an explanation of just why the RBA is so
concerned about the exchange rate that it was
nominated as a trigger for both of the latest two rate
hikes.
Today's Statement was therefore more balanced.
In terms of the net impact of the tax package on
economic activity, the bank appears fairly relaxed.
While the package will give the economy a direct
fiscal boost, the bank has also been mulling over the
impact on spending patterns of shifts in relative
prices. Its conclusion is that "the overall package, in
net terms, will shift demand from the second half of
the year (calendar 2000)into the first half", and not
the other way around.
One of the Bank's two main concerns regarding the
inflation outlook is the labour market.
The Bank is acutely conscious of the relatively low
unemployment rate, and notes survey evidence (the
NAB and ACCI Westpac business surveys) that
skills shortages have recently begun to emerge.
"In these circumstances, some upward pressure on
wages growth might be expected in the period
ahead."
But the bank clearly believes the risk is enhanced by
the impending GST: "The risk of a significant
acceleration in wages could be heightened by
increased inflation expectations, and by the high
headline inflation figures that will be associated with
the implementation of tax reform," the Bank said.
The Bank is concerned that enterprise bargains
containing clauses triggering higher wage rates in the
event of unexpectedly high inflation "may become
more prevalent in the months ahead".
Even if this does not happen, the concern remains
that "high CPI outcomes might trigger a more
general increase in ongoing price and wage
expectations."
The Bank is clearly reluctant to put a figure on just
how high the headline inflation rate might go.
However it seems to be nervous about the prospect
of inflation over 6 per cent.
It falls back on "the Government's published
modelling of the tax package" which suggest the
GST will add 2.75 per cent to the inflation rate
though 2000/01, but admits that the initial impact of
the tax shake-up "could be expected to be somewhat
larger".
Inflation is currently at 2.8 per cent, so it would not
take much, obviously, to push inflation to 6.5 per
cent or even higher, but this conclusion is left to the
reader.
It is also left to the reader to conclude that this risk,
and the consequent risk of higher wage demands,
has added to the pressure to raise interest rates.
Monetary policy is all about risk management, after
all.
The RBA has covered itself politically by repeating
the usual mantra that it will turn a blind eye to the
initial impact of the GST but that it will "remain
vigilant against second round wage and price
increases that might lead to an escalation in ongoing
inflation".
Even so, the chance of those second-round
influences getting off the ground will be enhanced
by a tight labour market and other pressures on
inflation as the GST is introduced.
So -- although the RBA would be loath to admit it --
there is a case for saying that tightening of monetary
policy we have seen so far is at least partly a
pre-emptive strike against those second-round
effects.
The other main concern of the RBA at the moment
is the exchange rate.
Although the Bank is uncertain about how quickly,
and to what extent, the lower exchange rate might
push prices up at the retail level, it sees the risk as
greater than it was in 1997 and 1998.
The main differences this time, according to the
Statement, are stronger domestic demand, higher
capacity utilisation strong global economic growth,
reducing competitive pressures both domestically
and internationally.
The Statement notes that the "pass-through"
depends also on how long the Australia dollar stays
as low as it is, and suggests, perhaps hopefully, that
"this weakness may not persist".
But it warns: "Added pressure on prices from this
source, at a time when domestic pressure may be
intensifying, would clearly be unhelpful."
Given that "domestic pressure" includes the sticker
shock effect of the GST, it is also reasonable to say
the looming GST has made the RBA more prone to
try to add some starch to the Aussie by lifting the
overnight cash rate.
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Truth is a pathless land. --- Krishnamurti
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