RBA - Interest Rates Remain Unchanged

On 2 June the Reserve Bank (RBA) announced their decision to leave interest rates unchanged at 3%.  The decision to keep the official cash rate at a 45-year low was widely expected, with many economists believing that there is still a chance of further rate cuts later this year.

The RBA is continuing to ignore the reality of what a normal rate is around the world.  For example, in the United States they are going to keep the official cash rate between 0%-.25% for the next 12 months, at least.

If we take a historic look at the RBA we can clearly see the impact of their decisions on the property industry and Australian community as whole.  As we entered the millennium the trend overseas was to lower rates, whilst the RBA announced that they would actually move to high rates and that it would lead the world to “normal” rates.  The result was that Australians were left stranded on high mortgage repayments.  This led to less construction (year after year), rising prices and much higher rents.  This burden placed on consumers was in direct conflict with the RBA’s charter to protect the living standards of Australians.

Then in late 2008 came the RBA’s belated about-face as they set about drastically dropping rates.  This was the single biggest step that kept the country out of recession.  It was the equivalent of giving every household in Australia an $11,000 pay rise.

The sad folly of the RBA’s stubbornness is not only the huge cost burden on all households and businesses in Australia, but the abnormally high rate in Australia attracts funds in.  This means we pay overseas lenders this artificially rate and even worse, this inflow drives Australia up which means we get even less for our exports.

Perhaps the solution is to have a royal inquiry into the RBA and pose a number of challenging questions that must rest on the minds of many economists and investors, and every Australia.

1. Where is the justification for the RBA saying in the past that the “normal” stance is double the rate of inflation?
2. What would the benefit have been to Australia if the RBA adopted the traditional normal rate which is 1% over inflation?
3. How much more income would Australians have received from our exports during the last nine years with this new normal rate?
4. How independent and knowledgeable are our independent board members?
5. If they are truly independent, why won’t the RBA Governor release each board member’s minutes as happens in other central banks?  Why continue this veil of secrecy?
6. Why do bureaucrats outnumber independent board members at a sitting?
7. Why did RBA Team Leader, Erica Ellis, in a speech in Melbourne recently, encourage the banks to increase their margins and strengthen the quality of their books?
8. The Governments AAA guarantee increases the major banks competitive power because they only pay 0.7% as opposed to the smaller banks paying 1% up to 1.5% to access this guarantee.  Why is there a need for this extra penalty which we know this has to be passed onto consumers?
9. Why is there no question over the viability of the banks powers with this AAA guarantee?
10. What evidence did the RBA supply to the Government that led them to formulate this biased AAA guarantee?
11. November 2007 saw the disappearance of the securitization market providing funds to the non-banking sector.  The AAA guarantee to a select part of the banking industry meant that this would not revive but be institutionalised.  What advice did the RBA give to the Government in relation to the securitisation market when the Government was formulating its AAA policy?
12. The miracle of avoiding a technical recession was due to the fact that the RBA belatedly gave each and every household a huge increase in spending power that would have previously gone to the banks.  In the RBA’s main minutes it used the term “lifting the burden on Australian households”.  Given this miracle and given that the budget’s own indicators are for unemployment to rise a dramatic 50%, why is the RBA still sitting on a high rate policy?  For example, in Canada the cash rate is 1.25% and borrowers can have 3.8% fixed for 3 years.

These question and more remain unanswered and will continue to remain unanswered without a public investigation into the practices and decisions made by the RBA for the ‘benefit of all Australians.’