Ideas@TheCentre
Failed US policies? Not in my back yard
Earlier this week, when the Aussie dollar reached an all-time high of $1.10, industry leaders Heather Ridout (Australian Industry Group) and Brian Redican (Macquarie Group) called for the Reserve Bank of Australia to consider taking measures to halt its rise.
Essentially, they were urging the RBA to abandon its prime responsibility of price stability and start intervening in the foreign exchange markets, because local exporters are doing it tough in the US market. So what would happen if the RBA were to put its inflation mandate on hold for other objectives?
The US Federal Reserve’s focus on propping up GDP and bailing out troubled financial institutions has paved the way for more quantitative easing and a steady debasing of the US dollar. If Ben Bernanke is adamant on ignoring inflation, that is for the US Congress to worry about and not to be emulated in Australia.
The RBA’s responsibility is price stability alone – they are to keep inflation between the mandated 2% and 3%. This contrasts to the mandate on the Federal Reserve, which includes a commitment to growth as well.
If inflation is above the target rate (currently 3.3%), a rate rise should be on the cards. If that puts some businesses under pressure, that’s unfortunate. But businesses are subjected to market fluctuations every day, and positive conditions for some are negative conditions for others. This is the nature of a diverse, modern market. Tailoring interest rate policy for certain producers – such as holding off rate rises for fear of a rising dollar – may help some Aussie exporters operating in the US but also creates losers at home.
In addition, there is reason to believe that the RBA’s inflation levels underestimate true inflation. Brad Orgill (former investment banker with UBS) noted in The Australian that while the prices of non-essential items (cars, furniture, TVs, laptops) are declining, prices of essential items (food, petrol, health care, electricity) have increased by 8%.
More importantly, the CPI ignores the costs of owning a home, the biggest financial priority of most working families. Increases in house prices from rising land prices are excluded from the CPI and interest charges on mortgages have been excluded since 1998.
With Bernanke suggesting that the US federal funds rate will remain close to zero for a prolonged period, it’s expected that the Aussie dollar will rise against the greenback (as will all other currencies). Any external attempt at maintaining exchange rate competitiveness for Aussie exporters will have little impact.
Just because the US Federal Reserve has abandoned price stability doesn’t mean that the RBA should too.
Alexander Philipatos is a Policy Analyst at The Centre for Independent Studies.
