Price Stability
Is said to occur when the general
level of prices is rising at an
acceptable rate, that is , inflation
will be contained with manageable
bounds
Manageable Grounds
• Means that the expected price changes
are small and gradual enough to be
absorbed by business and financial
decisions.
The R.B.A and its role with
Price Stability
• The objective as stated by the R.B.A is
to hold inflation to an annual average of
2-3 % as measured by the Consumer
Price Index in the medium-term, that is,
over the course of the business cycle.
Since 2000 Price stability
• Higher inflation was recorded in late
2000 as the impact of the GST price
changes were added into the CPI.
By the end of 2001 inflation fears were
gone and it again dropped between the
magic numbers of 2.5% and 3%
Last 5 Years
• Inflation remained at an acceptable
level between 2002 and 2003, at 2003
the rate is at the higher end of the
target, the RBA does not hesitate to
raise the cash rate in November and
December 2003.
• During 2004 all was calm but things
start to simmer during early 2005
Price Stability becomes a
Concern
• After March 2005 interest rates
remained on hold even though the CPI
growth was close to the top end of the
RBA’s target. The RBA did not seem to
be too concerned as it made an
assessment that inflation risks were
being matched by factors which did not
pose a danger to inflation.
Mixed messages
• Across 2005 and 2006 data seems to
indicate that all is well and that the
inflation target has not been threatened
due to an easing in household
spending, softer employment growth,
cooling
house
prices,
dwelling
construction approvals trending down
and stabilizing wages growth
The Year 2007
• As early as February 2007 warning
bells.
• Assistant Governor Malcolm Edey tells
Australian consumers rate rises is now
a month - by - month proposition. The
underlying inflation rate of 2.75 per cent
was “higher than ideal”.
The data
1. Higher Growth in wages
2. Demand and output “suggests that
some of the factors pushing up
inflation the year before remain
constant.
3. The economy is moving to full capacity
The RBA’s Response
1. The RBA is responding honestly to a flood
of data.
2. It had already raised rates three times the
year before, without a dent to Consumer
and Business Confidenceor Eco activity.
3. More construction activity to take place
especially in the resource states.
4. Fuel to inflation added on by employers bid
up wages to attract and hold workers.
The Economy is Hotting Up
1. RBA has its finger on the trigger to
raise rates. The sooner the better.
2. The RBA is now acting in a preemptive manner looking not at the
past but rather at the future.
3. The Reserve uses words as a warning
when it wants to avoid anything
stronger.
The weapons it has to tackl;e
the Economic Problem
1. Move rates
2. Publish research material to get
people talking.
3. Make speeches that change peoples
decisions, reducing the need to move
rates
Reality of 2007
1.
2.
3.
4.
Strong Eco Growth
Wages start to grow to high
Credit $39 billion dollars on credit cards.
6016 bankrupties in the Dec 2006 quarter,
nearly 20 per cent over the same quarter in
2005.
5. Consumer confidence has hit its highest
point in almost two years.
6. Strong labour market.
7. Interest rates perceived to be stable
Why then the interest rate rise
1. Keep inflation under control.
2. OECD figures show Australia has third
highest rate in the group, after Iceland and
New Zealand.
3. Higher rates make it harder for our business
to compete with the rest of the world.
4. Higher rates means higher dollar. Therefore
our exports become more expensive, our
imports cheaper.
Why then the rate rise
1. Australian producers are trade exposed and may go out of business
2. We have had 15 years of solid growth
we have reached near full capacity.
3. Businesses cannot meet supply.
4. Business cannot find workers it wants.
5. That pushes wages up.
Overseas factors
• Late 90’s early 2000s: Global economy
soars due to political stability, a share
market boom fueled by superannuation
and the growth of China and India
Money Money
• Plenty of Money becomes available to
lend, and a rush begins to find people to
lend it to.
United States of America
• In the U.S.people with limited ability to
repay loans are targeted by aggressive
lenders creating a huge subprime(high
risk)market. These are known as “Ninja”
loans- no income no job, no assets.
United States of America
• Many of these low -rate loans are
bundled together and sold and re sold,
creating a pass -the parcel investment
environment for billions of dollars of
debt.
United States of America
• When the low rate honeymoon period
ends and the cost of repaying loans
climbs hundreds of thousands of people
in the US cannot pay and default on
their loan.
United States of America
• Lending money becomes a risky
business. Money begins to dry up.
2007
• Banks and finance companies have to
pay more to borrow money on the
international market, and some find it
difficult to meet short - term debts.
• August 2007 global share prices begin
to fall sharply.
Victims
• Non- bank home loan provider RAMS is
one of the first to crumble in Australia,
being unable to refinance its debt. It is
eventually sold to Westpac.
• Australian companies Centro. Alico,
ABC Learning Centres and MFS see
their share prices plummet.
Australia and the rate rise
• In Australia inflation fears have already
seen interest rates rise. They begin to
climb further.
• January 2008 The U.S. President
George Bush announces a $US 150
billion emergency plan to kick start thee
U.S. economy.
United States of America
• The U.S Reserve Governor Ben
Bernanke cuts the official interest rate
again in a bid to keep the economy
moving
Australia’s Response
• In March , 2008 the Reserve Bank of
Australia raises official interest rates for
the 12th time. The official rate rise is
7.25 per cent it is a 12 year high and
leads to mortgage rates approaching 10
per cent. Mortgage holders are now
paying about $380 a month more on
their average $250,00 25year loan than
they were three years ago.
Impact on Low Income
Families
• Banks are repossessing Whittlesea homes at
a rate of one every four days as families
struggle to pay their mortgages, Supreme
Court records show.
• At least 22 repossession notices were issued
for homes in Whittlesea suburbs from last
November to January this year after
mortgage holders failed to meet their
repayments.
Factors
•
•
•
•
•
Struggle to put food on the table
Rising petrol prices
Higher interest rates
Higher housing costs
Poor infrastructure e.g. roads , trains
trams
Further Problems in Australia
• The Australian, stock-market has fallen
more than $300 billion since its
November peak. The RBA warns a
loosening of credit standards and
lending in the past few years could lead
to higher level of mortgage defaults in
coming years as interest rates and cost
of living expenses climb
More disasters
• Superannuation schemes plunge in
value. Losses to date are near $100
billion.
• Some retirees loose figures of $200,000
plus on their investment because of the
fall in prices.
To conclude
•
1.
2.
3.
4.
5.
6.
Demand Factors
Consumer Confidence
Rising Disposable income.
Business Confidence
Cheap credit and low interest rates
Strong or rising economic activity abroad
A falling exchange rate
Conclusion
Supply Factors
1. Lower worker productivity and rising wage
costs.
2. Higher cost for materials and equipment
used in manufacture
3. Higher interest rtes on business overdrafts
4. Rising in cost of utilities
5. Higher rates of company tax paid
Some food for thought
• Lowering rates encourages people to
borrow and spend, which revs up the
economy;raising them does the
opposite.
• Presently we have hit the brakes, while
in the U.S. they’re pumping the gas.
Some food for thought
• In Australia we are stating the RBA has been
to strong while in America consumers there
are blaming the Reserve Bank because the
rates are to low.
• The US Federal Reserve was worried the
economy may go down for the count so they
cut their rates from 6.5% to 1 % between
2000 and 2003 and in the process cretaed a
boom!!!!!!
Consequences
• Low interest rates bought a borrowing
binge. Those investors that had lost $5
trillion in the tech wreck moved their
cheaply borrowed chips to the property
market. The result was inevitable. Just
like going to a party where there is to
much grog, the property market started
off civil and got sillier.
China and India to the Rescue
• Australia has rich resources which will
set our economic sail to their calmer
seas, and in doing so avert much of the
pain.
• The only problem is China’s great
strength is as the manufacturing engine
for the world.
More food for thought
• With the biggest economy in recession,
and experts predicting Japan will be
next, China may find a sharp drop in
demand for its goods. This will have an
impact on their out put which means
less take up of our resources.
Consequences less growth, less jobs .
And what else !
• One million people in Australia presently
suffering from mortgage stress, which is when
more than 30% of your income goes towards
paying off a home loan.
• We have been on a borrowing binge of our
own-never has personal debt been higher.
• The past 16 years have been all about
borrowing and consuming. That’s now
finished.
The Fear of Deflation
• Deflation is a fall in the general level of
prices. Like rapid inflation, deflation
poses serious problems for economic
decision makers.
• In 2004 Japan and Hong Kong had
experienced 6 years of deflation and it
could be taking place in the USA
So why does inflation take
place
1. Too much money may be chasing too
few goods
2. Excess demand (demand pull inflation
3. Cost push inflation
4. Inflation can breed inflation
5. Depreciation of our currency
6. Structural rigidities in the economy
Summary
• Inflation is of concern because
1. It reallocates resources into
speculative and unproductive ventures
and away from productive investments
2. It arbitrarily redistributes income within
the community
3. It reduces international
competitiveness
BUST
• Deflation is commonly associated with a
collapse in wealth as a result of a “bust”
in real estate or share market prices or
both. When such a severe collapse in
asset prices occurs wealth is destroyed,