[zaph]

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Higher interest rates needed to contain mining boom, says Glenn Stevens

Glenn Stevens says the "task ahead is likely to be one of managing a fairly robust upswing". Picture by Ross Schultz Source: The Australian

HIGHER interest rates will probably be needed to cool the effects of Australia's biggest mining and energy boom since the 19th century.

Such a strategic policy direction would come into play as the boom overwhelmed Australia’s strengthening economy.

Speaking in regional Victoria, Mr Stevens reminded financial markets that monetary policy will have more to do in the near future as inflation appears likely to bottom out soon, with the economy on track to grow at above average rates in 2011.

International shocks are still a risk to the outlook for the $1.3 trillion commodity-rich economy, but the stimulatory impact of 60-year highs in the price of exports, relative to imports, will be strong.

“If downside possibilities do not materialise, the task ahead is likely to be one of managing a fairly robust upswing. Part of that task will, clearly, fall to monetary policy,” he told business people in Shepparton.

Mr Stevens also used the speech to revisit the idea that monetary policy is a blunt tool, noting that it affects different parts of the economy differently, but adding that the Reserve Bank of Australia must make policy decisions with regard to average national conditions.

“Monetary policy can't make those differences disappear. In the end, however, if monetary policy can help to deliver reasonable macroeconomic stability, that will offer the best chance for any industry, any region, any business or any individual to succeed on their merits,” he said.

http://www.theaustra...6-1225926810834

[Maria Santa B.A.]

Won't this conflict with the need for lower rates to protect RBA staff's investment properties?

[zaph]

Maria Santa B.A., on 20 September 2010 - 07:10 AM, said:

Won't this conflict with the need for lower rates to protect RBA staff's investment properties?

personally i think that idea is a bit overplayed. everyone likes to bash bankers, so i understand the other thread. i don't think the RBA are looking after their own interests when setting rates.

[tor]

Maria Santa B.A., on 20 September 2010 - 07:10 AM, said:

Won't this conflict with the need for lower rates to protect RBA staff's investment properties?

You've never been a manager have you? f*ck the staff, obnoxious and ludicrously up themselves bastards.

[tom]

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“Monetary policy can't make those differences disappear. In the end, however, if monetary policy can help to deliver reasonable macroeconomic stability, that will offer the best chance for any industry, any region, any business or any individual to succeed on their merits,” he said.

This is the key to it in my opinion.

Interest rates would have far less of an impact on mining than other parts of the economy. If we jack rates up it is only going to cool other parts of the economy to allow mining to go ahead without the capacity constraints it suffers now and inflation gripping the economy overall. Probably better for the miners bottom lines if Australia had an unemployment rate more like 7% than 5% anyway.

I can think of no other industry which would continue to forge ahead even if interests rates hit 10%. I can think of plenty of others that will hit the skids though including domestic building and retail.

So the overall economy might have capacity constraints and sure monetary policy will free up capacity (by reducing consumption and investment in more marginal industries) but I think housing will be far harder hit than mining.

As he says:

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that will offer the best chance for any industry, any region, any business or any individual to succeed on their merits

The undertone in my opinion is it will allow them to succeed on their merits by weeding out those just utilising capacity inefficiently.

[Max Carnage]

I don't quite understand this.

What is the mechanism by which increased resources prices are destabilising for the economy, that can be influenced by interest rates in a way that will be stabilising?

[tom]

Max Carnage, on 20 September 2010 - 11:59 PM, said:

I don't quite understand this.

What is the mechanism by which increased resources prices are destabilising for the economy, that can be influenced by interest rates in a way that will be stabilising?

Higher interest rates will allow capacity to be freed up so that more investment and capacity growth can occur in our mining sector. I think what Glenn is getting at is that it is a fiscal policy failure not monetary policy failure if our entire economy ends up being around finance and mining. The two most cyclical industries going! the best businesses within our framework will thrive in a higher interest rate environment, the worst will go broke allowing the best to grow.

All Glenn can do with monetary policy is ensure that there is capacity for any profitable business to grow without putting upward pressure on wages and inflation. He cannot pick winners of course and without fiscal policy or other policy directed at manufacturing etc if they should shrink as a result of monetary policy then these businesses are not the most profitable in our economy anyway but this is not Glenns fault.

So to prevent inflation and capacity constraints gripping the economy which is destabilising the RBA increases rates as necessary. If in 2 years we find we are shagged because resource prices drop while our whole economy is reliant on this sector then this is not his fault he can only set interest rates which drive the overall economy the most profitable businesses are probably better off as a result of lower wages and being able to grow those on the margins collapse leaving more capacity to be taken up by those which are profitable.

Sure it will probably drive more investment in mining but this is certainly not Glenn's fault and as he says the best businesses will trade on their own merits but without higher interest rates it is worse the best businesses are left paying top dollar for staff and local suppliers which feeds back into inflation.

So high minerals prices are destabilising in that they can cause inflation in wages as the miners to get people have to pay top dollars this feeds back into general inflation.

Higher interest rates combat this by freeing up capacity, making ventures on the margins unprofitable discouraging some investment allowing the better investments go ahead without paying too much for their inputs.

Yes on the flip side this will only go further in turning our economy into a quarry but Glenn can only do what are in his powers and that is to set interest rates at a level which allows good business to grow. That we might end up as a giant quarry is certainly not in the powers of the RBA to prevent only prevent inflation in the face of constraints to growth.

[Max Carnage]

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So to prevent inflation and capacity constraints gripping the economy which is destabilising the RBA increases rates as necessary.

Wouldn't it make more sense to simply plunder less resources (in other words to plunder them more slowly)?

What you're suggesting is that the non-resources economy gets squeezed so hard it sheds 'capacity' which can then move to BFN and work in the mines. That doesn't actually strike me as stabilising, given historical patterns of resource bubbles and busts...


If the mechanism is as you have described, this is a failure of government, not something that interest rates should deal with IMHO.

[tom]

Max Carnage, on 21 September 2010 - 03:22 AM, said:

Wouldn't it make more sense to simply plunder less resources (in other words to plunder them more slowly)?

What you're suggesting is that the non-resources economy gets squeezed so hard it sheds 'capacity' which can then move to BFN and work in the mines. That doesn't actually strike me as stabilising, given historical patterns of resource bubbles and busts...


If the mechanism is as you have described, this is a failure of government, not something that interest rates should deal with IMHO.

Absolutely.

However if the economy is gripped by inflation then yes capacity must be shed from somewhere and setting higher interest rates will achieve this end.

The government should have thought about this before stimulating the economy as hard as they did. Sometimes a few businesses going broke is a good thing. It is how market economies remain functional and cut down waste. Interest rates are only a global setting not a discretionary / targeted one. If the government of the day cannot manage through taxation and fiscal policy inflation then the RBA can only do it globally and they will do this to prevent inflation which is destabilising for any economy.