Standing Committee on Economics, Finance and Public Administration

Review of the Reserve Bank of Australia annual report 1997-98

Media release: 8 March 1999

COMMITTEE JUDGES RESERVE BANK'S PERFORMANCE AS ASTUTE

'The Reserve Bank's astute performance on monetary policy recently, and the positive impact this has had for the Australian economy, was highlighted in a Committee report to Parliament today.'

'The Economics Committee today tabled in Parliament its interim report on the Reserve Bank's annual report 1997-98 and the Bank's November 1998 semi-annual statement on monetary policy.'

'The Committee's report addresses several important aspects of monetary policy and other features of the performance of the Bank.'

'The report is based on discussions between the Governor of the Reserve Bank and the Committee at a public hearing on 15 December last year.'

David Hawker MP, Chairman of the Committee, said 'At the hearing we discussed Australia's significantly better performance during the financial crisis than most other countries in Asia. Over the past two years Australia had a growth rate of over 4% without significant upward pressure from inflation (which averaged 1.6% over the same period). The Bank attributed this to the following interrelated factors:

• the economy being in good shape when the crisis hit;
• the flexibility of Australian exporters and the commodities nature of much of Australia's exports;
• the soundness of Australia's economic policies;
• the flexibility and adaptability of the economy; and
• the floating exchange rate.'

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

• a review of the RBA's expectations of the economy and monetary policy for 1998 and associated forecasting errors by the Bank;
• the Bank's views on prospects for the economy for 1999;
• the differences between the Australian and US business cycles and the uncertainty about the US share market;
• the risk of deflation;
• the Bank's positive view of the impact of tax reform on the economy and its comments on the GST;
• the financial instability created by the establishment of hedge funds and strategies for dealing with those funds;
• improvements in the time taken by banks to pass on cuts in interest rates;
• the net effect of lower interest rates and higher bank fees and charges;
• implications for Australia of the introduction of the euro currency in January this year;
• progress with the new division of financial responsibilities, especially the payments system; and
• the financial industry's progress in addressing the "Year 2000 problem" that is now some nine months away.'

Ends
8 March 1999
Email: EFPA.Reps@aph.gov.au

Further information:
David Hawker MP (Chairman) 02 6277 4100
Beverley Forbes (Inquiry Secretary) 02 6277 4587

A copy of Mr Hawker's tabling speech follows.

For a copy of the Committee's report see:
internet:(http://www.aph.gov.au/house/committee/efpa/rba9798/rbaindex.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 is the first report that the new Economics Committee has tabled during this Parliament and I am pleased that it deals with one of our most important and successful financial institutions — the Reserve Bank of Australia.

The report addresses significant aspects of monetary policy and some other features of the operation of the Bank as discussed between the Governor of the Reserve Bank and the Committee at a public hearing in Melbourne on 15 December last year.

That hearing was one of our biennial meetings with the Bank to discuss such matters.

To date, the Australian economy has faired a lot better during the recent financial crisis than many other countries in Asia and the Pacific Rim.

Over the past year we have had a growth rate of 4.7% with inflation still below 2%. This growth rate has exceeded most expectations.

While unemployment is still too high (7.5% in January this year) and the most recent data puts the current account deficit at 5% of GDP in the last four quarters, the Australian economy has still done very well.

This is in part attributable to the astute performance of the Reserve Bank on the exchange rate.

The Bank's steady, deliberative approach to monetary policy has paid off.

Australia's and the Bank's achievements during the financial crisis are being recognised worldwide. As Professor Krugman has said 'Australia…is the miracle economy of the world financial crises…'

However, this good performance should not lead to complacency as the impact of the crisis is far from over.

In our report we discuss those matters in more detail, together with issues including:

• the differences between the Australian and US business cycles;
• declining prospects for growth in the Australian economy in 1999;
• the risk of deflation;
• the Reserve Bank's positive view of the impact of tax reform on the Australian economy and its comments on the GST;
• some possible solutions to the unemployment problem;
• forecasting errors by the Bank; and
• the process of opening to competition the Bank's monopoly in banking services to Commonwealth government agencies and departments.

While all of those issues are important I want to focus on two critical issues today. These are the growing impact of hedge funds and rising bank fees and charges.

First the hedge funds. This matter is of great concern to national and international financial regulators and governments. Hedge funds have generated a new source of financial instability in the world economy. They basically use borrowed money to bet on movements in financial prices. They bet on a particular currency or bond/stock price using hedge instruments, such as futures or options contracts.

While hedge funds are mainly American, work by the Australian Prudential Regulation Authority has revealed Australian banks also have exposure. This is via lending and as the counterparty to a swap transaction, particularly a foreign currency swap transaction.

The Committee together with the Bank and many other groups, supports three lines of action on hedge funds. These are:

• Firstly, finding out how large the hedge funds are (both on and off balance sheet);
• Secondly, banks reviewing their relationships with hedge funds which in some cases appear to have become quite incestuous; and
• Thirdly, bringing hedge funds into the disclosure net and possibly the supervision net.

The Committee is particularly concerned about the net effect on the costs of banking for the customer of lower interest rates and higher bank fees and charges.

At the hearing the Reserve Bank reported that even though fees have gone up in absolute terms, they have not risen nearly as much as community perception would imply as a percentage of the balance sheets of the banks.

The Reserve Bank has estimated that the cut in interest margins, which has been very significant over the last few years, would outweigh the rise in fees, particularly taking into account the fact that many people have the ability to shift from one product to another.

The Committee was not satisfied with this explanation. It has asked the Reserve Bank to prepare a detailed history of changes in bank fees and charges over the past 20 years so some comparision can be made.

We also intend to have a good look at the high interest rates on credit cards when we meet with the Australian Prudential Regulation Authority and the Australian Competition and Consumer Commission later this year.

The Committee will continue to monitor those two issues and other matters and will follow them up with the Governor at our next hearing with him, to be held in Melbourne on 6 May.

I thank the Reserve Bank, especially the Governor Ian Macfarlane and our secretariat staff for their assistance with this inquiry, and all members of the Committee for their contributions to the hearing and this interim report. The cooperative, bipartisan way in which the members have approached this work has shown parliamentary committee's working at their best.

I commend the report to the House.

Last reviewed 8 March 1999 by the Committee Secretariat
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