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RBA eases stance on interest

INTEREST rates will not rise simply to shore up the dollar.

Reserve Bank of Australia Governor, Ian Macfarlane, in a speech to the Committee for Economic Development of Australia, said the RBA had “no intention of departing from our medium-term approach in an ad hoc attempt to push up the exchange rate for its own sake”.

Mr Macfarlane was at great pains to point out that the RBA would not use interest rates to target a particular currency level.

However, he recognises the inflationary effects of a lower dollar were still a key concern for the policy setters.

In response to a question regarding the growth and strength of the Australian economy, Mr Macfarlane said the RBA’s assessment for growth in the Australian economy had not changed.

This suggests the RBA expects economic growth of around four per cent this year which seems optimistic based on anecdotal evidence gained from discussions with retailers and small businesses. Their view is things have slowed down markedly and consumer spending is drying up.

However, most statistics still show a growing economy.

The only statistic contradicting this has been the employment growth figures for October that showed a drop of 5,100 in the jobs that were created last month but the RBA is not looking at this in isolation.

Mr Macfarlane said there has been “phenomenal employment growth in Australia”. “We’ve had employment growing at 3.6 per cent per annum, that is a huge number in employment,” he said.

“A typical good trend for employment is 2.5 per cent and we are sort of moving back towards that.”

Mr McFarlane’s economic optimism is comforting.

Economic growth over the past five or so years has been strong and its continuation will be welcome.

The bogey over previous periods of growth has been inflation but it has not raised its ugly head in this period.

The expected inflation spike in the September quarter as a result of the GST did not eventuate but this cannot be seen as the end of inflation concerns.

All statistics show the price spike did not eventuate because businesses absorbed the price rises.

The upshot of this is the CPI figures for the December quarter will carry the price rise forward as businesses pass them on to the consumers.

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