You can't bank on anything these days

By Giles Parkinson

For much of the early 1990s, the Reserve Bank of Australia delighted in taking the markets by surprise when it came to movements in official interest rates.

In those years, first as the current account deficit hurtled towards oblivion and then as the economy began to do the same, the Reserve Bank of Australia was forced to manipulate the controls of monetary policy every few months.

The bank always makes interest rate announcements at 9.30 in the morning, but the size and date of the movements were subject to a frenzy of speculation.

The bank considered it a badge of honour if it was able to lift interest rates (or lower them) when the market least suspected.

The tension this created was so great that when expectations were at their height, financial news services were prone to sending out news flashes at 9.31 announcing that nothing had happened.

And that was news enough to move the markets.

In recent years, as the economy has stabilised and the bank concentrated its efforts on keeping inflation under control, its modus operandi was more fully understood.

Interest rate movements were few and far between, and were well flagged, and the central bank no longer sought to collect the scalps of market dealers who bet the wrong way.

Until last week, that is.

Although a rate rise on February 2 had been expected by most of the market for the past 4 to 6 weeks, the surprise was that the bank chose to lift the official cash rate by 50 points rather than 25, as most had expected. It justified its decision on the strengthening world economy and rising inflation rates.

In Australia, it cited robust household spending, a high level of job vacancies, buoyant housing prices, strong credit growth and signs of higher wage demands.

Not everyone agreed.

Indeed, it is difficult to remember an occasion when business groups expressed such uniform and bitter dismay about its actions.

If the central bank was keen to keep the economy under control, the question was: which economy?

Is it the one based around Sydney versus the rest of the country, or the one based around the creation of wealth from investments rather than the creation of wealth from production?

Business groups argue that the economy the bank is trying to control is a mirage, and can't be tamed by the methods it has at its disposal.

The real economy, they argue, is showing signs of strain, the manufacturing industry is struggling and mining is in a deep hole.

And, as if on cue, Coles Myer added fuel to the argument by announcing that its sales growth for the three months to January had been well short of expectations.

The role of the bank, and any central bank or Government, to harness the forces unleashed by this creation of wealth will be the focus of economic debate in the months to come.

Ironically, its ability to control aspects of the new economy were cruelly exposed by the manner in which the rate rise was announced.

Instead of a 9.30 announcement to all and sundry, an e-mail was accidentally sent to 64 market economists a full six minutes before the general release.

It revealed the finance industry at its worst. Dealers cashed in and made millions of dollars at the expense of those unaware of what the bank had decided to do.

Some banks were furious - not so much at the early release, but because their economists had been away from their desks and they had missed the opportunity to profit at the expense of others.

This sort of trading is commonly known as insider trading, but it seemed no one had any particular concern about taking the money.

"If you're locked inside a sweet shop," said one fixed interest dealer on national radio, "most people will want to fill their pockets."

But there was worse. Westpac, whose economists had been outspoken in their view that official interest rates would need to rise 150 basis points this year, received a resounding cheer from its dealing room live on national TV when the 50-point rise was announced last Wednesday. Of course, the Government was offended.

John Howard, fresh from his "hearing the people" tour of rural Australia, was outraged that a group of rich dealers should applaud a move that could have significant financial impact on much of middle Australia.

Treasurer Peter Costello thought so too, although he was more interested in pretending that the Government's economic policy had nothing to do with the rate rise, and certainly not the uncertainty and the inflationary impact of the GST.

In fact, he said, it was probably all the fault of the unions, who had signalled they would push for significant wage rises.

The bank may well be independent, but its interest rate movement remains the most political of economic acts.

* Giles Parkinson is the Australian Financial Review's deputy editor.