Fighting fire with fire

The Daily Telegraph went hard last Saturday on the value of the Reserve Bank of Australia (RBA) Governor, Glenn Stevens, asking if the nation's top money man was the most useless man in the country? Ouch!

I must reveal my hand up front that I have a column in the Tele on Saturday and arguably I was in the forefront of asking whether the RBA had gone too far with interest rates even way back in November - a day after the Melbourne Cup, which ironically was won by a nag called Efficient!

Given the 'useless' tag the RBA boss has been given, that horse's name is really significant.

Getting the job done

The Tele's response brought a spirited defence from some of the bovver boys in the economists' fraternity with the likes of my old mate Rory Robertson from Macquarie Bank, which now likes to be called Macquarie Group.

Rory's defence, which was a tad technical, actually showed that the RBA has kept inflation in the 2-3% band over the medium term, which is, in a nutshell, what Glenn Stevens's job actually is.

At what cost?

However, the current rate of inflation is outside the band and it couldn't happen at a worse time, with unemployment so low and piles of export income coming into the country and pushing up demand as well as prices.

This high level of inflation has meant 12 interest rate rises and some Aussies have seen their home repayments go up by possibly 60-70%.

Feeling the pinch

Imagine if your repayments were $1000 a month and they went to $1600. That would really hurt and given what most experts had been saying a few years back, the size of the rise of interest rates would have surprised the most prudent of amateur borrowers.

The heat is on

Since the Federal Government made the interest rate decision independent of the government of the day, the buck stops with the RBA board, but Glenn Stevens, as the Governor, is the guy who cops the heat or the praise.

It is a double-edged sword. Right now the level of inflation is causing higher interest rates, debt stressed families, cash-strapped small businesses, falling job ads, crushed consumer as well as business confidence and the worst business conditions in five years, if you can believe this week's NAB business survey and I do.

Fuelling the flame

Lots of the inflation has come from higher petrol prices, which Stevens can't be blamed for. And higher commodity prices affecting products such as wheat, export income and income tax cuts have fed the inflationary fire.

He can't be blamed for this, but he and his board is responsible for inflation. They also have an interest in economic growth and unemployment.

Money's too tight to mention

If the RBA has raised too many times and they create more job losses and bankruptcies than they actually needed to, then we can always say: "They could have done a better job."

There is also a case to say that the RBA is underestimating the impact of the credit crunch on business. Interest rates have gone through the roof on business loans and it doesn't bear thinking about the entrepreneurs who won't have a go at a new project because the price of money is too high.

And then there are businesses who are now seeing their interest bills on loans and overdrafts starting to squeeze their cash flow.

Driver's seat

Be clear on this, when the RBA raises interest rates everyone knows there will be blood on the streets, but the Big Bank's policies can control the amount of blood loss.

Too little, too late

With hindsight, the objective comment might be that after the Howard Government promised their tax cuts in May, the new boy Governor of the RBA, Mr Stevens, should have responded with a half-a-percent increase in interest rates.

That would have nipped the latest inflation spurt in the bud, but there would have been a political outcry. Stevens is a tough customer and it shows in his media performance, much to his disadvantage, but history suggests he and his board should have hit harder earlier. Politics got in the way, but by November on the day after the Cup - just before the election - the RBA did raise but the horse had bolted.

Downward spiral

Now the 'experts' are saying that top end Sydney house prices could fall by 30% over the next couple of years and if that's happens, then it will be in the context of New South Wales being in recession. The west of Sydney property belt has been tightening for years and if the wealthy suburbs spit the real estate dummy this would be a prelude to a severe downturn.

This would be followed by interest rates heading south.

Time will tell

The final judgement on Glenn Stevens should be by year's end. If he got it right, I will be the first to take my hat off, but if he's wrong he will cop it.

Deciding to be a major figure in politics, business, economics or the media means you are always on potential media trial. It goes with the patch and there can be some unfair calls, but there can also be more than fair ones often thanks to spin doctors.

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Fighting fire with fire

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