Review of the Reserve Bank of Australia annual report 1998-99

Media release: 13 March 2000

PARLIAMENTARY COMMITTEE PROBES INTEREST RATE RISES

The Reserve Bank's reasons for the two recent interest rate rises were highlighted in a committee report to Parliament today.

The House Economics Committee today tabled in Parliament its interim report on the Reserve Bank of Australia Annual Report 1998-99 and the Bank's Semi-Annual Statement on Monetary Policy November 1999.

The report is based on discussions between the Governor of the Reserve Bank and the committee at public hearings on 29 November last year and on 9 February this year.

David Hawker, Committee Chairman, said: 'With the economy emerging from the recent economic crisis in Asia in such good shape, we are concerned at the extent of the interest rate increases applied by the Reserve Bank in November 1999 and February this year, of 0.25% and 0.5% respectively.'

The Governor indicated to the Committee that in the changing international economic circumstances, there was good reason to move away from the existing expansionary monetary policy. As our major Asian trading partners recover, the pressure on the Australian economy is easing.

'However, the Committee would not wish to see the current nine-year period of growth in the economy brought to a premature end by excessive interest rate increases', said Mr Hawker.

Mr Hawker added: 'Other important matters addressed in the report are:

• a review of the RBA's forecasts for the economy and the failure of the predicted slowdown in growth to emerge;
• the Bank's positive outlook for the economy for the rest of the financial year;
• the Bank's confidence that although inflation is expected to rise with the introduction of the GST, this will be a temporary effect;
• the Bank's view that the recent rapid growth in household debt has been largely offset by a concurrent rise in household assets;
• some labour skills shortages and possible pressure on future wages growth;
• the flattening out of business investment;
• the Australian financial system's smooth transition through Y2K;
• preliminary evidence on the increase in some bank fees charged to small business;
• why some consumers act in ways that disadvantage themselves financially, simply to get bonus points from their use of credit cards; and
• why direct debit payment has not gained wide acceptance in Australia.'

The Reserve Bank Governor will appear again before the Committee on 22 May in Melbourne.

Ends
13 March 2000

Further information:
David Hawker MP (Chairman) 02 6277 4100
Tas Luttrell (Principal Research Officer) 02 6277 2375
Email: EFPA.Reps@aph.gov.au

A copy of Mr Hawker's tabling speech is attached

For a copy of the Committee's report see:

• internet: http://www.aph.gov.au/house/committee/efpa/rba9899/interimrep.htm
• or contact the Committee Secretariat.

Committee Membership 39th Parliament

Chairman: Mr David Hawker MP
Deputy Chairman: Mr Gregory Wilton MP
Members:
Mr Anthony Albanese MP
Ms Anna Burke MP
Ms Teresa Gambaro MP
Mrs Kay Hull MP
Mr Mark Latham MP
Mr Christopher Pyne MP
Hon Alex Somlyay MP
Dr Andrew Southcott MP

TABLING SPEECH: DAVID HAWKER MP, CHAIRMAN

Mr Speaker this unanimous report addresses significant aspects of monetary policy and some other features of the operation of the Reserve Bank, as discussed between the Governor of the Bank and the Committee at public hearings in Sydney on 29 November last year and 9 February this year.

The November hearing was one of our biannual meetings with the Bank to discuss such matters.

Let me immediately focus on our major concern in this report - the recent interest rate rises.

In the last four months, the basic interest rate has been increased twice by a total of 0.75 per cent.

These increases, taking the rate from 4.75 per cent to 5.5 per cent, mark a significant change in the Reserve Bank's policy compared with declining interest rates since July 1996.

The Committee has been pleased with the way that the Australian economy has weathered the difficult circumstances of the last two or three years. However, we would be reluctant to see a strong growth trend, now in its ninth year, brought to a premature end by excessive interest rate increases.

While appreciating the Governor's explanation that the changing international economic circumstances have been a good reason to move away from existing expansionary monetary policy - it would cause concern in many parts of the economy to see that trend in interest rate rises continue.

Another issue of particular interest to the committee discussed in the report is bank fees charged to small business.

For a number of years the Economics Committee and its predecessor committees have discussed with the Reserve Bank interest margins, bank fees and charges, and bank profitability. This issue is never far from members' minds. Recent events like the CBA offer for takeover of Colonial and concerns about the likely impact on branch closures and staffing levels, make sure of that.

Based on the data produced by the Reserve on bank fees charged to small business, the Committee was able to draw some preliminary conclusions. While there have been fee increases, there does not seem to have been a systematic increase across the board. However, as the statistics only covered two years, the Committee would like to see more figures before placing too much weight on them.

At the time of the hearing the Bank also reported that it was unlikely that the increases in fees charged to small business have offset the benefits received when interest rates fell. With the recent two interest rate increases though, the time is coming to take another close look at that.

The Bank has promised to provide more data as soon as possible and that information is awaited with interest.

Similarly, the Committee was able to report on the work being carried out by the Bank on so-called 'interchange fees'. These are the fees charged by the banks that issue credit cards, to the businesses where the cards are used. One of the main issues of concern is that interchange fees for credit cards may be encouraging the use of credit cards relative to other more efficient payment instruments. That study will also encompass the question of loyalty schemes that provide bonus points to credit card users.

A third issue I would like to raise is that of the very rapid rise in household debt.

In the last two years household debt, as a proportion of disposable income, has increased by 12 percentage points to reach 94 per cent. The Bank maintains that this is largely offset by concurrent increases in household wealth. Despite this assurance, the matter remains one of concern to the Committee.

In our report we discuss the matters I have mentioned in more detail, together with a range of other issues, including:

• points of commonality in Australian and US interest rate policies;
• the effect of the GST on inflation levels;
• the possibility of wages pressure as the inflation rate begins to rise;
• derivatives trading; and
• the smooth changeover to Year 2000 by the financial sector.

In conclusion the Committee is able to report that the Reserve Bank is predicting that the current financial year will be another good one for the economy.

Growth is anticipated to be 4 per cent; inflation will be in the 2 per cent to 3 per cent range; and unemployment is expected to edge down below 7 per cent (6.7 per cent in February).

Unfortunately, recent economic data puts the current account deficit at 6 per cent of GDP and the Bank's expectation is that it will be some time before it returns to a lower level.

With the tide of the recent financial crisis now receding, we can see that the Australian economy has continued to cope with that crisis far better than many other countries in Asia and around the Pacific Rim.

The Committee will continue to monitor all of these issues and will follow them up with the Governor at our next hearing with him, to be held in Melbourne on 22 May.

I thank the Reserve Bank, especially the Governor Ian Macfarlane, for their assistance with this inquiry. I would also like to thank all members of the Committee, our Secretariat staff and adviser for their contributions to the hearing and this interim report.

The cooperative, bipartisan way in which the members of the House Economics Committee continue to approach this work, once again shows the parliamentary committee system working at its very best.

I commend the report to the House.

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