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Spirited debate before rate hike -

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Spirited debate before rate hike

Peter Ryan reported this story on Tuesday, October 20, 2009 12:22:00

ELEANOR HALL: This morning the Reserve Bank revealed that its decision to raise rates last month
was one that provoked vigorous debate among board members.

The minutes of the Reserve Bank board meeting reveal that members discussed the risk of prematurely
raising rates and the possibility that the recovery might be due mainly to the Government's fiscal
stimulus payments.

Our business editor Peter Ryan has just returned from the RBA lockup in Sydney and he joins us now.

So Peter, the minutes show the board was worried that putting up rates too early. What were the
concerns?

PETER RYAN: Well, Eleanor we are coming out of the worst downturn since the Great Depression and it
seems members are still worried that the economic prospects for most of the developed world remain
uncertain, and also that the possibility of another downturn or shock could not be ruled out.

And we saw in the minutes that members noted that Australia's prospects are currently being propped
up by developments in Asia, in particular China. And the board was also worried that the Australian
recovery had been due to the greater-than-expected impact of fiscal stimulus and they felt that
opened up the risk that activity might slow down as the stimulus faded.

So basically, it seems there was a vigorous debate from some members of the board that rates should
perhaps be kept on hold so further data could be evaluated.

ELEANOR HALL: As we now know, the board ended up deciding to raise rates. Was there any one
deciding factor?

PETER RYAN: Well, there was a pretty powerful argument around what was on "the other hand" and they
were worried that the risks of waiting to push the rate button had increased and members seemed
concerned that underlying inflation was still above the target band of two to three per cent.

And the trough in inflation was higher than earlier thought and remember that fighting inflation is
the key task of the Reserve Bank.

So keeping rates low at 3 per cent could weaken the inflation fight, it was argued and perhaps see
other imbalances build up in the economy.

So after what appears to have been a very full and open discussion of all the pros and cons, the
tightening bias began with an increase of a quarter of percentage point.

ELEANOR HALL: So Peter, does all this indicate that the board was in fact split on whether or not
to raise rates?

PETER RYAN: Oh, if only we knew. The minutes only provide only an overview - the board does not
vote, and the outcome is based on what the Reserve Bank calls a consensus decision.

Now that's different to the US Federal Reserve, for example, which outlines dissenting members by
name and opinion.

But we did get an insight about the level of debate last Thursday when the RBA governor Glenn
Stevens spoke in Perth.

He opened the window on how the RBA board reaches the ultimate decision. He made the point that
everything is on the table, none of the RBA members are "shrinking violets" and that the board is
not in any way a "rubber stamp" for the RBA's advice and that appears to have been played out at
the most recent meeting.

ELEANOR HALL: So do these minutes provide any signals on how many more rate rises we should expect
and how quickly?

PETER RYAN: Well, the minutes show that the RBA is convinced that the Australian economy is in the
midst of a major recovery and that Australia did avoid the worst of the downturn.

I think Chris Richardson from Access Economics summed it up yesterday when he said that Australia
didn't just dodge a bullet, it outran it.

But there are some key words in the final paragraph of the minutes that we went through today that
the quote "current very expansionary setting was no longer necessary and possibly imprudent". So on
that basis and the view the Australia would be protected by China if another shock hit by some
chance, we can expect more rate rises, perhaps back to back in November and December.

And there is a growing view out there that the Melbourne Cup might provide an opportunity for a
rate rise. They meet on the first Tuesday of each month. That could be quite an aggressive rise of
perhaps half a percentage point underscoring the view that the economic emergency is indeed well
and truly over.

ELEANOR HALL: Peter, thank you. That is Peter Ryan, our business editor.