Price Stability

1. 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

2. Manageable Grounds • Means that the expected price changes are small and gradual enough to be absorbed by business and financial decisions.

3. 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.

4. 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%

5. 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

6. 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.

7. 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

8. 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”.

9. The data • Higher Growth in wages • Demand and output “suggests that some of the factors pushing up inflation the year before remain constant. • The economy is moving to full capacity

10. The RBA’s Response • The RBA is responding honestly to a flood of data. • It had already raised rates three times the year before, without a dent to Consumer and Business Confidenceor Eco activity. • More construction activity to take place especially in the resource states. • Fuel to inflation added on by employers bid up wages to attract and hold workers.

11. The Economy is Hotting Up • RBA has its finger on the trigger to raise rates. The sooner the better. • The RBA is now acting in a pre-emptive manner looking not at the past but rather at the future. • The Reserve uses words as a warning when it wants to avoid anything stronger.

12. The weapons it has to tackl;e the Economic Problem • Move rates • Publish research material to get people talking. • Make speeches that change peoples decisions, reducing the need to move rates

13. Reality of 2007 • 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. • Consumer confidence has hit its highest point in almost two years. • Strong labour market. • Interest rates perceived to be stable

14. Why then the interest rate rise • Keep inflation under control. • OECD figures show Australia has third highest rate in the group, after Iceland and New Zealand. • Higher rates make it harder for our business to compete with the rest of the world. • Higher rates means higher dollar. Therefore our exports become more expensive, our imports cheaper.

15. Why then the rate rise • Australian producers are trade -exposed and may go out of business • We have had 15 years of solid growth we have reached near full capacity. • Businesses cannot meet supply. • Business cannot find workers it wants. • That pushes wages up.

16. 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

17. Money Money • Plenty of Money becomes available to lend, and a rush begins to find people to lend it to.

18. 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.

19. 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.

20. 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.

21. United States of America • Lending money becomes a risky business. Money begins to dry up.

22. 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.

23. 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.

24. 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.

25. 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

26. 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.

27. 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.

28. Factors • Struggle to put food on the table • Rising petrol prices • Higher interest rates • Higher housing costs • Poor infrastructure e.g. roads , trains trams

29. 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

30. 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.

31. To conclude • 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

32. Conclusion Supply Factors • Lower worker productivity and rising wage costs. • Higher cost for materials and equipment used in manufacture • Higher interest rtes on business overdrafts • Rising in cost of utilities • Higher rates of company tax paid

33. 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.

34. 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!!!!!!

35. 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.

36. 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.

37. 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 .

38. 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.

39. 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

40. So why does inflation take place • Too much money may be chasing too few goods • Excess demand (demand pull inflation • Cost push inflation • Inflation can breed inflation • Depreciation of our currency • Structural rigidities in the economy

41. Summary • Inflation is of concern because • It reallocates resources into speculative and unproductive ventures and away from productive investments • It arbitrarily redistributes income within the community • It reduces international competitiveness

42. 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,