Gillard, Interest Rates, the RBA and the Liberal Party

Here we go again.  Today has seen some narrow and biased analysis of economic policy and political imperatives concerning the Prime Minister Julia Gillard’s comments on the economy, interest rates and the Budget.

Gillard’s words boil down to the point that having tight fiscal settings in a climate of on-going unbalanced economic growth will allow for easier monetary settings which in turn will stem the rise of the Australian dollar.  It’s actually the best policy mix when a country has a terms of trade shock which leads to excessive currency strength and risks exacerbating internal imbalances within the economy.

Before Gillard uttered a word on the issue, people like tin-man Christopher Joye, executive director and strategic advisor to Yellow Brick Road Funds Management and Rismark International, continued to push his empty barrow of the politicisation of the RBA.

I don’t think Chris actually read the speech or reporting of it with an opening comment that:

• “The Prime Minister has broken with historical convention–for an incumbent government–and called on the RBA to lower interest rates”

Well Chris, the Prime Minister neither said nor implied anything of the sort.  Here is what she did say at various times during the speech:

• The RBA has “plenty of room to move further if need be”.

• “we can give the Reserve Bank room to move on monetary policy if it chooses to”

• “In the current economic environment, should the RBA consider it appropriate to change the cash rate [it can move]”

Any observer can see that all that PM Gillard and the government is seeking is a shift in the balance of economic policy towards tighter fiscal policy and easier monetary policy.  And PM Gillard has made it crystal clear that the independent RBA may choose, if need be and if it considers it appropriate, to ease monetary policy some time down the track.

There’s nothing more than that.

Chris Joye obviously doesn’t remember or choses not to remember that during the 2004 election campaign, a Liberal Party advertisement mentioned:

• “Under Labor, you may need to find an extra $962.23 every month just to keep your home.”  *

*  Source: Reserve Bank of Australia

Despite the obvious absurdity of this claim, and recall that the 2004 campaign was the election when Mr Howard claimed that “interest rates will always be lower under the Liberal Party”, the Reserve Bank under the Costello-appointed Governor Ian Macfarlane kept quiet on the issue, even though the Australian Electoral Commission has raised it with them.

Had the RBA and Ian Macfarlane come out and shown the claim to be a complete mistruth, it may well have altered the momentum in the election campaign.  It chose not to.

The RBA did, nonetheless, write to a W Meeham, the Liberal Party person on the advertising material, on 28 September 2004, saying:

• “We [the RBA] are most concerned that this could give the impression that the RBA has endorsed the brochure, when in fact is has not.  This view is reinforced by the fact that members of the public have contacted the Bank seeking explanation of the claims in the brochure.  Please ensure that no further distribution of the brochure occurs.”

The link to that letter is here:

http://www.rba.gov.au/media-releases/2005/pdf/mr-05-05-attach.pdf

Quite interestingly, RBA Governor Ian Macfarlane refused to make this comment public before the election even though the RBA has been in contact with the Australian Electoral Commission and interest rates were a dominant election issue.

The issue only came to light after an FOI investigation.

The RBA Press Release of 8 April 2005 outlining the issue is also copied below.

Media Release

Number	2005-05
Date	8 April 2005
Embargo	For Immediate Release

Correspondence Between Reserve Bank and Australian Electoral Commission

During last year’s election the Reserve Bank passed on a complaint from a member of the public to the Australian Electoral Commission (AEC) about a leaflet distributed in an electorate in southern Sydney and authorised by a Mr W. Meehan. Following the advice received from the AEC, the Bank notified Mr Meehan. The Bank did not raise the matter with the Government or the Federal Liberal Party.

Enquiries:

Mr David Emanuel

Secretary
Reserve Bank of Australia

SYDNEY

Phone: +61 2 9551 9700