Talking about interest rates

While the media has gone for a negative view on rates, the economists' view is a little less worrying. But for anyone in debt or running a business where interest rates count, the man you should really listen to is the Reserve Bank Governor, Glenn Stevens.

They're all ears
He gives his views in a quaint ceremony, which is called his testimony, to the House of Representatives Economics Committee. It's basically a show-and-tell exercise, where politicians and the money market professionals listen intently to what the boss of the Big Bank has to say.

Pollies care about the electoral impact of changing interest rate policy, and the money market mob are trying to make money on guessing the future right.

Everyone's listening
Average Australians in debt listen hoping to hear good news of falling interest rates, while retirees who invest in interest-bearing securities can have the opposite attitude to debtors. Higher interest rates can improve their returns.

So, what did he say?
Stevens is happy with the progress on the inflation front, but he quickly threw in the following sobering comment: "It is still too soon to declare victory".

Who cares about elections!
It was nice to see that he didn't take issue with those economists' views or money market pricers who think interest rate settings are on hold. However, he did give the pollies a heart palpitation by rejecting the idea that interest rates couldn't be adjusted in an election year.

One for the Treasurer
At this stage he was not jumpy about fiscal policy - that's the Government's taxing and spending policy - but there is a bit of warning there for Treasurer Costello.

You see, the annual Budget comes up on the second Tuesday in May - that's 8 May - and if the Howard Government is behind in the polls, as they are now, it could be tempting for the Treasurer to get generous with tax cuts. This would loosen fiscal policy and put pressure on Stevens to look long and hard at the inflation effects of a 'nice guy' Budget.

The scissors are out
Right now, many economic number watchers think interest rates could be cut later in the year, but it will rest on inflation heading down and unemployment possibly rising, especially in those states that are economically struggling.

Some states are suffering
New South Wales, Victoria, South Australia and Tasmania could easily do with an interest rate cut shot in the arm and it puts pressure on Costello to pull off a magical play of winning over voters without attracting post-Budget headlines such as: "Taxes down, rates to rise".

An expert's view
CommSec's hotshot economist Craig James viewed the observations of Stevens in the following way: "The latest comments from the Reserve Bank Governor strengthen the view that interest rate settings are solidly on hold. Inflation is forecast to remain in 2-3% target band, and while ever that's the case, there is no need to move interest rates in any direction."

A good call
It's not quite as good news as rates are about to fall, but it is better than believing the next move will be up.

Eye on employment
Personally, I am going to watch the job numbers, as this seems to be a big watch for Stevens. If we get good news on the unemployment front it means the job market tightens and this flows through to wage levels. Wages can grow at about 4% and not hurt inflation, but any higher and there could be a price effect that could bring interest rate concerns back to the forefront of money market minds.

View on shares
The Big Bank's view on the stockmarket was interesting. "Deputy Governor Ric Battellino said that the past four years had been remarkable," Craig James reported. "Share prices had risen in line with earnings to the extent that the price-earnings ratio had eased modestly. The Reserve Bank was quick to rule out that the sharemarket was showing bubble tendencies." That's really interesting for those playing the market.

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