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Reserve Bank seen as too close to the Government following the Governor's comments about the markets' reactions to the balance of payments figures and the Opposition Leader's 'five minutes of sunshine' comment.

ELLEN FANNING: Finally, to the Reserve Bank Governor, Bernie Fraser, who has described as near hysterical the market and political reaction to May's record current account deficit. At a speech in Melbourne, yesterday, he also dismissed the claim that the economic recovery has only produced 'five minutes of economic sunshine,' a phrase often used by the Federal Opposition Leader, John Howard. Mr Fraser's comments have led to claims that the Reserve Bank is becoming too political. Well, Bruce Hockman is a former Reserve Bank economist now with Bain & Co. He told Stephen McDonald that whatever the reality, Mr Fraser's comments had created a perception that the Reserve Bank is now a bit too close to the Government.

BRUCE HOCKMAN: Certainly, I think it is a good general rule in markets that all reactions tend to be over-reactions in any case. Certainly, it was a record deficit. That came as a very big surprise to markets and they reacted to that, initially, but moreso over judgements - we have seen the dollar creep up since then so I don't think that it is providing a great downward momentum to the market any more.

STEPHEN MCDONALD: What about his general analysis - do you agree with it - on the state of the economy?

BRUCE HOCKMAN: Yes, generally speaking, we don't see that there's any need in Australia, looking at the domestic indicators, for any rate cut in the near term. In fact, the risks as we see it, still are that the next move in rates is going to be towards tightening. Bernie seems just a little bit more neutral than that at the moment. He seems to be suggesting that depending on the data over the next few months, that will determine which way the next move is going to be. But at this stage there are still some fairly substantial risks on the inflation front that the Reserve Bank is taking seriously.

STEPHEN MCDONALD: Now, what his comments about John Howard's analysis that his statement regarding 'five minutes of sunshine' is something of a hollow-sounding throw-away? Does he have a point here?

BRUCE HOCKMAN: Well, certainly he's made a point, there, and it is certainly technically true to economists that the recession finished back in 1991. The unfortunate thing is that most people didn't notice the recession ended there and so the fact that the Howard comments still seem to hit the mark seem to be indicating that the benefits of that growth haven't flowed through to everybody at the moment. I think the unfortunate aspect of the comments is that it just reinforces perceptions amongst some people that the Reserve Bank is not as independent as it should be and in fact I think it is quite true the Reserve Bank is independent in its actions, but really the market doesn't need this sort of ammunition to use against them.

STEPHEN MCDONALD: Well, looking at this independence, there is a headline in 'The Australian' this morning which reads 'Fraser's foray into election politics risks bank's credibility.' Are you saying you totally disagree with that?

BRUCE HOCKMAN: No, I am saying that that sort of foray into the political arena by quite deliberately, clearly, using a direct quote of something the Opposition had been saying, he could have made the same point without being, perhaps, so political on it, and talking to a number of off-shore investors, that is one of the perceptions that it's been very difficult for the Reserve Bank to overcome: the perception that the Reserve Bank is just a little bit too close to the Government.