Oops! I meant to send that elsewhere. My apologies!
Trudy
Trudy & Rod Bray wrote:
>
> 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.
>
> � This material is subject to copyright and any
> unauthorised use, copying or mirroring is prohibited.
>
> --
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