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Bernie Fraser leaves two warnings



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39/91 19 February 1991

BERNIE FRASER LEAVES TWO WARNINGS

The main purpose of the speech today by the Governor of the

Reserve Bank, Bernie Fraser, was to condition the market for a further reduction in interest rates in the next month or so.

The message was simple enough, reducing on inflation is the key objective (no mention of the current account any more) and since the Reserve Bank sees inflation at 5 per cent by mid-year and the Bank sees a need to chance its arm ahead of "unanimity amongst the whole range of economic indicators", we can expect the easing

in policy to come sooner rather than later. Hence the market rally after the Speech.

But two warnings should not be missed by Mr Keating.

First, the Governor shared the Coalition's concern about a return to the "roller coaster" ride in the economy arising out of policy settings in the 1980s (see attached chart). As he said, "we have seen inflation fall in times of slack growth, only to jump back as activity picked u p ."

Clearly he is telling Mr Keating not to try to pump-prime the economy by loosening policy stances (he noted that fiscal policy is already set on a "counter-cyclical" course). That is why he tells Mr Keating that "consolidation of the lower inflation now

in prospect will require maintenance of a reasonably firm monetary policy." And the less that is done in the March

Statement, the firmer that policy will have to be.

Second, the Reserve Bank is clearly worried about the past effectiveness of prudential supervision and that is why the Governor publically canvassed a move to US style "hands on" approach. Thus he says if experience was to reveal serious

shortcomings in its present system it would seek to develop some "in-house capacity to assess for ourselves the significance of potential problem loans and to make judgements about the adequacy of a bank's system for managing risk".

Could it be that Bernie was taken for a ride by some of the

banks, including some of the State Banks, and is inclined to look at the techniques that J.P Morgan and others are using when assessing bank's books?

FOR FURTHER INFORMATION CONTACT 06 277 4022

COMMONWEALTH PARLIAMENTARY LIBRARY MICAH

PRIVATE DEMAND AND CREDIT the roller coaster in action!

% DEMAND HALF YEAR INCREASE % CREDIT ANN INCREASE 30

25

20

15

10

-2

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2

I 81 I 82 I 83 I 84 I 85 I 86 I 87 I 88 I 89 190

QUARTERS

PRIVATE DEMAND PRIVATE CREDIT