Hear! Hear! Governor Tells The Markets What They Already Know
The Age
Friday June 15, 2007
INTEREST rate trouble is always looming in the sharemarket. When the economy is strong, the worry is that rates will be pushed higher to contain inflation, making the returns shares offer relatively less attractive, even as the economy expands. When rates fall, the mood is better, because the cost of money is falling, but even then there are nagging fears that the economic weakness that prompted rate cuts will continue, infecting profits, dividends and share prices.
Nirvana is the middle latitudes: where demand is growing, but not at a rate that overexcites central bankers. A world where interest rates stay where they are or, if they rise, do so predictably and gently, creating room for businesses to deploy their own skills to magnify the growth the economy is delivering. Shares have been in that place for four years, and they bounced (and the Australian dollar fell) yesterday because Glenn Stevens isn't yet charting a new course.In his closely watched speech, the Reserve Bank Governor as good as said that if growth stays as strong as it is here and overseas, rates will go up eventually. But that was no revelation.The question is how far out there the rate rise is, and Stevens exuded confidence that the settings are right: he calmed fears that recent strong jobs and growth numbers would force the Reserve to raise rates as early as next month, pointing out that inflation remains comfortably low. The Reserve, he said, had time on its side - and that heartens those exposed to a bull market now more than four years old.He spoke of a world that is delivering "a boost of first-order importance" to Australian income, and of the stabilisers that were cutting in, notably the rise in the dollar. Labor supply is as a tight as it has been in a generation, but wages are not marching upwards uniformly: the supply side of the labour market is more elastic than it was before wage fixing was decentralised, and wage relativities are shifting in what Stevens said yesterday looked to be "a textbook case of adjustment." As a result, Australia's chances of avoiding its traditional boom-bust cycle were "much higher," he concluded.He added caveats. Concerns about inflation remain, and the Reservereviews the situation each month, having given itself room to do so last year by raising rates three times. But that is more than covered by the half a percentage point rise in bond yields in the past eight weeks. The Governor told the markets what they already knew, and that's the way they like it.theage.com.au? Read the speech at theage.com.au/businessday
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