glenn stevens: worth every penny

Glenn Stevens: he worries so you don't have to

SMH April 9, 2011: GLENN STEVENS is going to have to work for every dollar of his $1 million-plus pay packet this year. The Australian economy is at a crossroads, as a resurgent mining boom fires up parts of the economy but inflicts pain on others.

The task of steering the economy through this intersection is made all the more difficult by this year’s cyclones, floods and earthquakes, which play havoc with official jobs, economic growth and retail figures.

Setting interest rates is often likened to driving a car by only looking in the rear-view mirrors, thanks to the uncertainty of the future and inevitable time delays in collecting and publishing of historic economic data. After this year’s natural disasters, the task is more like driving with a blacked-out windscreen and mud spattered all over your mirrors.

This could be used as an argument for the Reserve Bank to leave interest rates where they are until the dust settles. But there are also risks in waiting too long.

Low unemployment and emerging skills shortages risk sparking a wages and inflation spiral. Wages growth is already back to its historic average. Since monetary policy works with a lag of about a year-and-a-half – we are only now beginning to get the full impact of interest rate rises a year ago – the Reserve can ill afford to get behind the ball on managing the inflationary pressures of the mining boom. Rate hikes later this year remain a real possibility.

Yes, this means interest rate-sensitive, non-mining parts of the economy will suffer in relative terms.

Home construction remains in the doldrums, while the property market has stagnated as first-home buyers and investors take a step back. Retailers are screaming blue murder as shoppers keep their hands in their pockets – or only produce their credit cards long enough to bag an online bargain thanks to the turbocharged Aussie dollar. Manufacturers, tourism operators and the education sector are all feeling the pinch of a higher currency.

Is that an argument for the Reserve to keep interest rates on hold? Well, no. The Reserve knows its job in coming years will be to stand on the throats of households to make room for a massive mining investment boom. It is not the Reserve’s job to choose whether it would prefer a mining boom as strong as it increasingly seems to be. It can only respond with the one lever it has to ensure price stability.

The Reserve will not be too troubled to learn that house prices have stagnated and the property market has cooled. That is exactly what it was hoping for. Economists have debated whether it is the job of central banks to “lean against the wind” of steep asset price appreciation, such as in house prices. The former US Federal Reserve chairman Alan Greenspan is partly credited for creating the American house price bubble by keeping interest rates too low. That is not an accusation that can now be levelled at Australia’s Reserve Bank.

At the end of the day, Australians are taking an almighty gamble that the China-inspired commodity boom will be strong and long enough to deliver rising average living standards,enough to overcome pockets of pain. All our chips are on red.


Reserve Bank governor Glenn Stevens’s remuneration package this year.

Average reported taxable income in 2008-09 in postcode 3944, Portsea on the Victorian coast, the highest in the country.

Slump in loans for new homes over the three months ended February — the biggest three- month fall in 32 years.

Average taxable income in 2008-09 in postcode 2027 — Darling Point, Edgecliff and Point Piper — the second-highest.

The share of new loans approved for first homebuyers in February, down from 28.5% in May 2009.

Jobs created over the past year, driving jobless rate below 5 per cent.

Rise in capital city house prices over the year ended February.

Value of one Australian dollar on Thursday night, a post-float record spurred by the stronger-than- expected jobs figures.

Rise in share prices during that time.

Sources: Reserve Bank 2010 Annual Report, CommSec Research, Australian Bureau of Statistics, Australian Tax Office Tax Statistics 2008-09,,

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